Stocks Are Pointed Higher

Stocks are pointed higher in pre-market trading.  However, there seems to be a ceiling forming that could prevent stocks from making significant gains.  If the ceiling does hold, we could see the stock market rally stall.  That would be good news for the mortgage bond market, which has really taken a beating the past few weeks.

Merrill Lynch came out with saying they are now selling long term government bonds in favor of the riskier assets of stocks.  In their analysis, they point out that a long term hold in the stock market performs better than a 60/40 split of stocks and bonds.  Although we can assume their numbers are true, the one key point that could hurt their strategy is timing.  Selling bonds to purchase stocks when stocks are at all-time high levels and at what consider to be the late stages of an economic expansion could lead to sharp losses over the next year or two.  Long term stock averages are heavily influenced by strong periods of gains, such as what we have experienced in recent months.  By executing a pure stock strategy when stock prices are near a peak, that seems to be a risky move.

With mortgage bonds under significant ceilings of resistance, we will maintain a locking bias.