After taking a big hit two days ago, stocks formed a reverse head and shoulders pattern right on its
25- day moving average. This is a bullish indicator that showed its strength in early trading this morning, driving stock prices significantly higher. This is creating a headwind for mortgage bonds, which generally compete for the same investment dollars. This is a technical rally that could set the stage for stock prices to challenge new all-time high levels in the days to come. The key thing to remember is that with many signs of a troubled economy ahead, the higher stock prices climb, the greater potential fall when the rally does come to an end. I believe the economic expansion we have enjoyed for nearly a decade is on its last leg. I see this as a time to proceed with caution, but not necessarily to call it quits just yet. I’m watching this closely and will be ready to adjust when the time comes.
One of the most predictable signs of a pending recession is when the yield curves begin to invert. This means that you can achieve a higher rate of return on a shorter investment relative to a locking up your money for a longer period. At the tail end of last week, the 3-month treasury rate was paying a higher return than the 10-Year. This is a terrible sign for the longer-term economic outlook, and another clear indication of a recession around the corner.
There is much debate about the impact of the next downward move in the US economy. Since most economists predicted interest rates to continue to climb, many have lost credibility in my book, including the Federal Reserve. The signs of lower rates ahead were clear to me. However, most experts couldn’t see it. So, when the same experts say this will be nothing more than a “hiccup”, take that with a grain of salt.
With bond prices seemingly looking to soften in the near term, we will take the safe play and switch to a locking bias.