12 Jan Safe play is to lock
Stocks are attempting to break out of the downward channel that has driven the DOW Jones Industrial Index and the S&P 500 lower all but one day in 2016. A breakout would be a welcomed sign for investors as they look for some relief following day after day of suffering. The drop in stock prices has helped improve mortgage bonds, driving mortgage interest rates lower. As we discussed for months leading up to the Federal Reserve interest rate increase, mortgage interest rates have liked the Fed’s move. Stocks, on the other hand, have really struggled in the new environment. Since drops in a market never happen in a straight line, today’s improvement in stocks could just be temporary. Sentiment can quickly reverse as the trading day wears on.
There was an interesting comment from the Royal Bank of Scotland (RBS), advising their clients to sell everything except for high quality bonds. They feel that the stock market is highly vulnerable and could suffer losses of 20%. Although this opinion is not shared by all major financial investment companies, we feel that it could certainly be likely. The stock market appears vulnerable, as evidenced by trading patterns since the Fed began the process of raising interest rates. That will certainly be something the Fed will consider as they mull over how many rate increases they should do in 2016. In our opinion, it will be no more than 2.
Although stocks are strong today, mortgage bonds are also doing well. Since we are currently challenging the 200 day moving average, the safe play will be to lock. If you choose to float, do so carefully and only if able to watch the markets closely.