200 DMA battle

After suffering significant losses last week, the stock market is looking to move higher today.  mortgage bonds moved above the 200 day moving average on Friday.  So far today, they dropped back below the 200 DMA and then moved back above and are now sitting right on the line.  We anticipate this battle will continue today, as the 200 DMA is usually one of the toughest lines to cross.  Generally, until there is a decisive move above the 200 DMA, there is no room to claim victory.

This week brings a lot of news, with housing data, GDP, a Federal Reserve Open Market Committee Meeting, and a presidential address to name a few.  It should be interesting to see the market’s reaction to the Presidential State of the Union Address, as the primary topic will be income inequality.  This sounds like “tax hike” to many wealthy investors, which isn’t something they will like.  With the stock market at ridiculously inflated levels due to federal stimulus, and with the stimulus now slowing, the stock market is on shaky ground.  Should a meaningful correction in the stock market occur, bonds will likely benefit, which will help keep mortgage rates down for a while.

The December New Home Sales report was released today, showing only 414,000 units sold.  This is significantly lower than expected, and a 7% decline from the previous month.  Although home value appreciation was at 8.4%, this pace is also trending lower.  With the 200 DMA battle underway, the safe play is to lock.  However, Wednesday’s FOMC meeting and policy statement could help improve mortgage bonds if the statement is bearish.  Given the recent reports and weakness shown in the stock market, this may be the case.