If you choose to float, do so carefully

If you choose to float, do so carefully

The markets are in a bit of turmoil, as stocks and bonds exchange shots back and forth trying to decide a winner.  Overall, 2016 appears to be a high risk year for the stock market.  In the end, 2015 was far from stellar, with stocks only managing to close with minimal gains for the year overall.  With corporate profits on the decline, the Federal Reserve raising short term interest rates and employment numbers reducing year over year, 2016 could easily be an uphill battle for the stock market.  In fact, it is reasonable to see a 10-15% drop in stocks at some point in the calendar year.  That would be helpful to mortgage bonds and could be a strong catalyst to keep low rates around for the foreseeable future.

 

After climbing above its 200 day moving average on Friday, mortgage bonds opened the day lower and are now trading just below this critical level.  However, the 10 Year Treasury Note yield is holding beneath its 200 DMA, which is a great sign for mortgage bonds.  As long as the 10 year stays at current levels, mortgage rates should hold steady.  Now that Friday’s super strong BLS report has settled into the minds of investors, most have realized that true long term job growth was in-line with expectations.  40% of the 292k new jobs reported were filled by 16-19 year olds.  These are clearly seasonal jobs and not long term economic driving careers.

 

If bonds are able to get back above their 200 DMA, we could see the improvement in mortgage interest rates continue.  However, there is great risk in floating at these levels.  A look back in history shows that bonds typically retreat when pressured against the 200 DMA.  If you choose to float, you should do so carefully and only if able to watch the markets closely.