As expected, the stock market moved past the terror attack panic and moved higher in late day trading. This drained money out of the bond market in hopes of earning greater returns in the stock market. This caused enough weakness to push mortgage bonds back beneath the floor of support that was holding rates from deteriorating. Bonds are now beneath both their 50 day moving average as well as an important Fibonacci level. Whether or not they are able to muster the strength to make another run higher will be highly dependent upon the performance of the stock market. Although stocks are lower so far this morning, the recent trend has been for stocks to make rallies later in the day. This could cause further deterioration in mortgage pricing, causing the APR on mortgage loans to adjust higher later in the day.
One method used to predict the near term direction of the stock market is to measure the overall sentiment of investors. There seems to become a point where investors become complacent, assuming markets will continue to increase in value. With the consistent move higher we have been experiencing; we have seen an increase in optimism within the market. This could be an early indicator of susceptibility to downward market pressures. In fact, the last time we saw this strong of a sentiment was just before the drop we experienced last December. If we do see stocks make a break lower, that would likely help support mortgage interest rates. However, it’s far too early to make that prediction.
Mortgage bonds are now at the top of a sideways channel, and have appeared to form a downward channel. We will have to see if this downward channel continues to develop. In the meantime, floating is very risky. Therefore, we will maintain our locking bias.