Very cautiously floating

The extreme volatility in the stock and bond markets continues today.  Friday was an interesting day for both markets, with stocks hitting intra-day all-time highs once again.  Mortgage bonds ended the day higher, adding more distance from the dreaded 200 day moving average.  So far today, stocks are losing the battle, with the S&P 500 sitting just below the important 2000 mark.  Mortgage bonds have finally stabilized and are now trading in the middle of a large sideways channel.  Bonds will likely take direction from the stock market today.  However, with bonds trading in a large channel, we must exercise caution as we approach the next overhead resistance.

This will be a heavy news week, with the most significant report coming out on Friday when we get a reading on GDP.  As we often mention, the two most significant reports that have the greatest influence on the direction of mortgage interest rates are GDP and CPI (Consumer Price Index).  If GDP is reported to be stronger than expectations, mortgage rates will likely move higher.  However, with market expectations near the 4.6 level, we feel that expectations will be difficult to exceed.  Considering that the last reading was 4.2, economic conditions seem to be inline or below expectations.  However, we have to wait and see when the report is released.

We received more evidence of a softening housing market this morning, with Existing Home Sales reported down 1.8% at 5.05 million units.  This was significantly below expectations of a 1% gain.  Further, there were downward revisions to the prior month’s report.  Overall, the housing market appears to be softening once again.  The typical strong summer buying months missed expectations, and now we are heading into the softer months of winter.  Hopefully we will see mortgage rates come down a bit to help support a our housing market.  As we have been saying, our market is not yet prepared for higher interest rates, and could really use lower rates to spur additional homebuyers.

With mortgage bonds moving higher, we will have a cautiously floating bias.  The general rule is to float when at the bottom of a channel and lock when near the top.  Since we are in the middle of a large sideways channel, bonds will move in the direction of current momentum.  As we approach the next resistance levels, we will need to take a more cautious approach.  If the losses in the stock market continue, bonds may muster the strength to break above resistance.  Who knows, maybe that will come in the form of a lower GDP report on Friday?  Watch the markets closely if you choose to float, and be prepared to lock should sentiment reverse course.

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