Stocks at Critical Juncture

In late day trading yesterday, stocks took a major bounce off of their 200 day moving average.  Although this move was accredited in the media to investor optimism surrounding continued stimulus, it was a technical bounce that was expected by most advanced traders.  This morning, stocks have already lost all of their gains from yesterday’s late rally, and are once again in a battle with over the 200 DMA.  The key thing to know about technical predictions is that the more times a support line is tested, the weaker it becomes.  This is now the third test in three days.  It seems that stocks really want to break downward.  If that happens, we can expect a more dramatic fall in stocks to follow.

This morning we received the Federal Reserve’s favorite gauge of inflation, the Personal Consumption Expenditures (PCE) report showing that inflation remains tame.  The Headline number increased by 0.1% last month, which ended up dropping the annual rate from 0.6% down to 0.5%.  The report showed that personal incomes fell by 4.2%, which was surprisingly low.  Since this number does not take into consideration unemployed workers, this means that the average employed worker has experienced a 4.2% average pay cut.  When you take into consideration the number of people out of work, this is not good news for the US economy.

Mortgage bonds remain near the top of a trading channel.  Although there remains little risk in floating at the moment, be on guard as sentiment can change quickly.