As we expected, mortgage bonds have been trapped in a very tight trading range, as they were unable to make a break above their 25-day moving average. As we speak, mortgage bonds are trying to muster the strength to make a break above this critical level. Whether or not they will have the ability to do this today will greatly depend upon the stock market After China reported the lowest GPD numbers in 27 years, US stocks should be falling sharply. As we know, China is the second largest economy in the world. The US and China dictate much of how the world economy operates. As the US and China go, so does the rest of the world. However, the US stock market remains to function as if it is on crack and completely oblivious to that which would usually cause it to fall. Hopefully, it will at least be enough to give bonds the boost they need.
Quarterly corporate earnings reports are generally released near the 15th of the month in a new quarter. Therefore, we will start to hear of releases coming soon. With last quarter reports coming with a warning of slower growth ahead, the markets have presumably already baked in for weaker earnings to be released. It certainly doesn’t make sense that stock prices would be at all-time high levels at a time when earnings are falling. Lower earnings generally push prices lower, as investors like to stay at reasonable price / earnings (P/E) ratios. Since lower earnings push this ratio higher, the current market is not reflecting reality. As mentioned above, it is a stock market on crack. Eventually, this will change, and prices will fall. When will this happen? Who knows? This stock market seems to me completely dysfunctional. But it will eventually happen.
With bond prices trapped in such a tight trading range, anything can happen. I suggest floating if you can closely watch the markets and lock in should bonds lose the battle.