After taking a shellacking last week, the stock market bounced off the floor of support we have been talking about. We are now moving higher in early market trading. This expected move could lead to a nice rally for stocks as we close out 2018. December tends to be a good month for the US stock market. If stocks can break out of their strong downward trading channel, the next significant ceiling is the 25-day moving average. Although this level is not generally considered to provide a strong level of resistance, it has proven to be more difficult in recent weeks. The true sign would be a break above the 200 DMA. That would be needed to change the opinion of stock market skeptics who believe we are in the early stages of a bear market. I happen to fall into this category. A break above the 200 DMA would help sway my opinion.
Although today is a slow day for scheduled economic reports, the week heats up as the days roll on. Much of the news of the week will be on the housing industry. Given that October was the month in which we saw an up-tick in mortgage interest rates, it will be interesting to see if this increase has had an impact on the strength of the housing industry. If you follow this blog, you know that I’m a bit of a pessimist when it comes to the near-term direction of home values. I just don’t see both mortgage interest rates and home values being able to sustain the current pace of increase. I believe that we will either see a softening in mortgage interest rates, a softening in home values, or both. I don’t see our market being able to sustain both at the same time.
After switching back to a locking bias last week, I feel the path remains prudent. Unless mortgage bonds can break above their 50-day moving average, we can expect pricing to get a bit worse in the days to come.