Locking Bias

Mortgage bonds are slightly higher this morning after the Fed Empire Index came in at a weak 4.48 reading, while the market was anticipating 8.5.  Considering that January’s report came in at 12.5, this is a dramatic decline.  Stocks are continuing their upward climb, as the impressive rally seems poised to reach all-time highs once again.  We feel that as the stock market approaches their high point, the risk of a correction is worth noting.  In tracking two of the last peaks the market has made in the past 15 years, and even as far back as in 1929, there are eery similarities in the charts today.  In each case, just after peaking out a second time, the markets faced a strong pull back.  Certainly not to say this will happen, as there are many reasons the market has to climb higher, it is simply worth noting.

Mortgage bonds are currently just below the triple layer of support they broke beneath on Friday.  Whenever we are beneath prior support it is a time to be cautious.  With the stock market just beneath all-time lows, a pull-back in stocks will help boost bonds back above what is currently resistance.  Until we see a sign of a strong move higher in bonds, we will maintain a locking bias.  For those who wish to take a risk and see if bonds can pull above the triple layer of resistance, watch both the stock market and bond market carefully.  Generally speaking, a pull- back in the stock market will improve the bond market, while a stronger stock market tends to push interest rates higher.