volitility is high

The stock market fell hard at the opening bell but has since recovered some of its losses.  The bond market shot higher right out of the gate, pushing mortgage rates down to lows not seen since May of last year  The change in the markets was fueled by surprisingly low inflation numbers and continued weak economic news.  The fears of Quantitative Easing coming to an end creating challenges for the stock market appear to be coming to fruition.  QE3 will expire by the end of October, so markets will be tested as to how well they perform on their own without Fed intervention.  It would be difficult to argue that the Fed is at least partially responsible for the stock market gains that have propelled each stock index to all-time highs.  Without the trillions of printed dollars being invested in the markets over the past few years, it is highly improbable that the markets would be at current levels.  The good news is that the Fed does not have plans to sell the investments purchased for many, many years.  A sell of such assets would certainly cause our economy to spiral downward.

Purchase mortgage applications were again reported to be down this week over the last.  This time, the drop was 1%.  Although not a dramatic reduction, the trend has not been moving in the desired direction.

More importantly, the Producer Price Index (PPI) for September was reported to be down 0.1%.  This was below expectations of +.01%.  Core CPI (excludes food and energy) was unchanged.  Year over year, both PPI and CPI were +1.6%.  This is well below where the Fed would like to see this figure, and not heading in the direction the Fed was hoping it would be heading after spending upwards of $80 billion per month through QE3.  The primary intensions of QE3 were to stimulate inflation, push the stock market higher and to increase employment.  For a time, it was working on all fronts.  We will now see what happens in each of these areas when the market is left to itself.

Bonds are now right up against a strong resistance level.  The volatility level is extraordinarily high, with massive swings in both the stock and bond markets.  At this point, we are going to take a bit of a cautious approach as we watch and see how this plays out.  With pricing of mortgage rates at these low levels, it would be difficult to pass on the current opportunity at hand.