16 Oct Stocks Explode Higher
As expected, the stock market is wildly higher today. After breaking back above its 200 day moving average, the technical climb higher kicked in to full speed. We can now expect the stock market to move up towards the next ceiling of overhead resistance, which will be found at the 100 day moving average. However, that gives stock investors a ways to go before they need to be overly concerned. This will generate a lot of profits for stocks in the meantime. Now that stocks are climbing higher, we can expect to see a strong headwind for mortgage bonds, as investors will choose to put their money in the stock market rather than the bond market.
The Federal Reserve is continuing to lessen their purchases of mortgage backed securities. As the months go on, the amount of reinvestments the Fed is planning on making into the bond market will continue to fall. By taking out what has been the strongest buyer in the mortgage bond market, we can expect the prices of mortgage bonds to fall until a new equilibrium is established. This will drive mortgage interest rates even higher in the near-term. Add to this the combined effort by the Fed of also raising short-term interest rates, and you have a perfect recipe that will lead to higher mortgage rates.
Given the strength of the stock market rally, we will maintain our locking bias.