Stocks and Bonds at Critical Decision Point

Mortgage bonds climbed back up to the top of their trading channel. This is great news for mortgage interest rates, which are now once again matching the lows we saw earlier this year. The question of whether bond prices can break above this level remains to be answered. Since they have failed to pass this point multiple times in the past, odds are once again not in our favor. As a result, we can anticipate that tomorrow will be a down day for mortgage bonds. However, in the event mortgage bonds do build the strength to break through, we could see mortgage interest rates improve to the next 1/8% better. That would certainly help stimulate the housing market which is failing to show the positive improvements most have expected to see. Given that we are on the brink of the typical best time of the year, numbers should be much stronger than they are now.

The US stock market is once again heading dramatically lower today. In fact, stock prices are in a similar situation to bond prices, but in the opposite. Stock prices have their 200-day moving average not too far beneath current levels. Therefore, we can anticipate a turnaround just around the corner. If stocks happen to break beneath this critical level, that would coincide with a nice improvement in mortgage bond pricing. But once again, the odds of that happening are slim. We will likely see stocks improve and mortgage bond prices worsen by tomorrow or at least within a couple of days. I’m not sure the world is quite ready to accept the reality of the future.

Given the predictions listed above, we will maintain a locking bias.