After falling to their 200 day moving average, stocks have bounced off this critical level and are now moving much higher. This move was expected, as stocks haven’t convincingly been beneath their 200 day moving average in more that two years. However, I still believe that stocks are due for a more significant pullback, which means that I believe it will fall beneath this level at some point in the near to mid-term. At that point, mortgage bonds will be the beneficiary and we could see mortgage rates improve. Although I believe it will happen, I’m Just not sure exactly when that will be.
Trade war fears are softening this morning, as hopes of a trade deal being struck with China is helping to boost the U.S. stock market. According to Treasury Secretary, Steve Mnuchin, there are very productive conversations going on between the U.S. and China. He feels confident that a trade deal will be reached. If that becomes reality, stocks will likely continue to improve, which will not be friendly to mortgage interest rates.
Mortgage bonds have tried to overcome their 25 day moving average 20 times since mid-September. Chances of bonds overcoming this critical level in the near term are low. As a result, we will maintain our locking bias.