The recent gains in the US stock market haven’t been driven by corporate earnings, signs of stronger inflation or strength in the US economy. Rather, they are primarily a result of continued assumptions that the Fed will maintain the status quo of near zero interest rates and loose monetary policies. Since this is a continual changing opinion, be careful not to get too overly confident that the trends of the most recent weeks will continue. These conditions can only take the stock market so far before investors realize their rationale has been built on weak fundamentals and a lack of compelling reasons to continue.
Although on shaky ground, mortgage bonds remain trapped beneath overhead resistance and the 200 day moving average as a floor. This range has created some level of stability for mortgage rates the past three weeks. However, we could be in the early stages of the creation of a downward channel. We’ll have to watch this closely to make sure it doesn’t develop into something of strength that will take bonds beneath their 200 DMA. On this day 28 years ago the stock market experienced what is known as Black Monday. It was a day when the US stock market lost 22% of its vague in one day! It’s very difficult to imagine the impact of such a major event. However, like everything else, it eventually worked itself out and likely caused the ones who panicked to lose while the ones who exercised patience to benefit.
With bonds trapped beneath resistance, we will maintain our locking bias.