Stocks once again set new record highs on Friday, with the S&P 500 surpassing the 2175 level that it has fought to overcome the pass three weeks. Today is a quiet news day, so the technical picture will heavily influence today’s trading. So far this morning, stocks are trading near unchanged levels and mortgage bonds are slightly higher. If stocks continue to run higher today, it will create additional headwind for the bond market. However, if stocks fall back beneath previous all-time high levels, bonds will likely be the beneficiary. We will have to wait and see if stocks now have a clear path higher or if this run up was just a temporary blip.
Mortgage bonds are now trading in a narrow range, trapped between their 25 and 100 day moving averages. The 100 DMA has proven to be a strong level of support in the past. Therefore, losses may be limited to about 35 basis points below current levels if the market continues to further weaken. A strong surge in stocks could provide the catalyst for this to happen. On the other hand, if bonds find the strength to break above their 25 DMA, there is a great deal of room for bonds to move higher.
It is reasonable to assume that bonds could experience a bit of pricing loss from current levels. If you don’t have an appetite for risk, rates are great and now is a nice point to lock. However, if you choose to float, do so carefully. Watch the 100 DMA. Should bonds threaten to break below this level, lock in.