Stocks Hoping for a Reversal

Stocks are at it again; this time falling beneath the low levels they experienced last week. The saving grace could be that they are likely to bounce off the floor of support that is just beneath current levels. In fact, we could see stocks make a nice run higher as the trading day wears on. The general rule is that once the bottom of a trading channel is hit, the next move is more than likely to bounce higher. Although it is certainly possible that stocks could continue to fall, I’d be placing buy orders right now. Keep in mind that if stocks do break beneath this floor, they could have a long way to fall. That would provide a nice tail wind for mortgage bonds and could help drive interest rates lower.

Tomorrow is the first day of the Federal Reserve’s two-day Federal Open Market Committee Meeting (FOMC), with the decision on interest rates and monetary policy to be announced on Wednesday. Although we anticipate the Fed to raise rates, we feel they will have a more non-committal tone regarding future rate hikes. This move could help further tighten the spread between the two and ten year note yields. As the two come closer, the odds of a recession intensify.

Given that mortgage bonds remain beneath their 200-day moving average, and that we anticipate stocks to bounce higher, we will maintain our locking bias.