Technical picture warrants a locking bias

Stocks had a stellar day yesterday and are once again shooting higher today. A look back on the stock charts shows that the stock market has a history of long, sharp drops lower followed by equally as steep climbs back higher. So far, the stock market recovery is repeating this pattern. Although too early to say if they will have the strength to muster a full recovery, so far the results are impressive.

The bond market is again under pressure, as the stock market’s gains have pressuring bond prices lower. Adding additional pressure to the bond market, a second reading on 2nd quarter GDP showed a large revision higher from 2.3% to 3.7%. This was stronger than the 3.2% increase anticipated. This strong report adds further confusion to the Fed as they decide when to move rates higher. Although there are many reasons to hold rates steady, this reading on GDP is certainly strong enough to justify a rate hike.

Mortgage bonds remain trapped beneath multiple layers of overhead resistance and appear weak in the face of a strong stock market. It is likely bonds will continue to fall and break through additional layers of support, pressuring mortgage rates higher. Given the technical picture, we will maintain a locking bias.