Stocks are again setting new all-time high records, as investors continue to ignore the on-going threat of military action with North Korea. Yesterday, NK’s leader, Kim Jong-un, warned of retaliation if the UN Security Council approves a plan to impose more harsh sanctions against North Korea. The state-owned Korean Central News Agency, citing a statement from the country’s Ministry of Foreign Affairs, released the following: “The forthcoming measures to be taken by the DPRK will cause the US the greatest pain and suffering it has ever gone through in its history.” Shortly after, it was announced that the sanctions against North Korea were approved. Therefore, we can anticipate further retaliation from Kim Jong-un. As a result, I anticipate that the US stock market will lose steam and commentators will cite North Korea as the reason. We will have to wait and see at what point stock investors realize the irrationality of the market being at current levels.
Mortgage bonds have broken beneath their 25-day moving average and seem poised to soon test their 50 DMA. This fall will essentially wipe out weeks of improvements we have had in mortgage interest rates in just a matter of days. As we often see, once bonds break below a channel, they tend to fall sharply. Hopefully the 50 DMA will hold. If it doesn’t, bonds could experience a long drop towards their 200 DMA.
There seems to be very little to celebrate in the bond market. We will maintain our locking bias.