Stocks moved sharply lower yesterday, crashing beneath the 25-day moving average before finding support at the 50 DMA. This move lower shows an increasing level of volatility that could prove to be a forewarning to a larger move to the downside. Overall, volatility in the stock market isn’t a good thing for most investors. While it provides day traders the opportunity to make quick profits, it is more a sign of misfortune for the longer-term investor. We will have to see if this plays out. It certainly is a risk.
The inverse correlation between stocks and bonds appears to be unraveling. This poses significant risks for those who live by the 60% stock and 40% bond rule. As we have seen in recent trading, stocks and bonds are often moving in the same direction. Further, the managed stock accounts are being replaced by simple index tracking funds. This puts into question the future of investment management, as it doesn’t take a professional to purchase an index fund. These are all significant developments that will impact the future direction of mortgage interest rates.
With both mortgage backed securities and the 10 Year Treasury Note on the wrong side of their 200 day moving averages, the technical picture for interest rates is not looking pretty. Inflation concerns across the globe are the primary driver of the recent increase in interest rates. It seems the Fed rate hikes have not slowed job growth or slowed the pace of price increases.
Until bonds can show some resilience, we will maintain our locking bias.