06 Oct Locking Bias
Stocks are following through on Friday’s rally higher this morning. The stronger than expected job market was able to push the stock market above its 100 day moving average, which now puts it in position to challenge its 50 and 25 DMA. Based on the technical indictor, it appears likely that this will happen, and possibly even get back towards all-time highs. However, this by no means is evidence that the stock market will be avoiding a long overdue correction. Since it has been well over 1100 days since the last noteworthy stock market correction, odds are increasing that it will happen sooner rather than later. The increased volatility is certainly a pre-signal that a more dramatic drop is in the works.
This week will bring many Federal Reserve Speakers to the podium to share their opinions on the market. We know beforehand which members will be pushing for early rate hikes and which ones are less optimistic about the economy’s ability to sustain independent of continued Fed stimulation. Although there will not likely be any real surprises, the markets tend to react to “old news” as if it were new. Therefore, there may be a higher level of volatility in the bond market as a result. As has been the case of late, the market seems to be looking for any gleam of hope that the future will be rainbows and unicorns. Therefore, the words spoken have a higher likelihood of causing harm to bond prices.
Mortgage bonds are likely to gravitate towards the bottom of their trading channel, which appears to be between 102.4 and 102.8 on the 3.5% coupon. This will likely create upward pressure on mortgage rates again today. As a result, we are going to maintain our locking bias, as we see little hope of a significant improvement in the bond market today. In the face of a rising stock market, bonds will have a significant headwind and will be at a serious disadvantage today.