Friday 07/10/2009

After a significant rally higher, Bonds have been ripe for some profit taking and a
reversal lower – and yesterday’s weak Treasury auction results triggered a plunge
lower in pricing. This morning, Bonds are fighting to regain some lost ground as
prices sit almost exactly between a floor of support at the 50-day Moving Average,
and a ceiling of resistance at the 100-day Moving Average.
The economic calendar has been light this week, and as we mentioned yesterday,
Traders seem to be scrounging around under the bleachers searching for morsels
of good news. But this morning, two different economic reports have already
shaken things up a bit for Stocks.
First, the Balance of Trade, which measures the difference between our imports
and exports, came in at a surprisingly narrow reading of $26 Billion in May –
dropping 9.8% compared to the previous month’s reading, as exports rose and
imports declined. Not only did this month’s reading come in significantly off from
expectations that the deficit would widen to $30 Billion, but it also was the lowest
deficit in nearly a decade.
While some may try to grab headlines and take credit for their efforts to narrow the
trade deficit, those in the know – like our Mortgage Market Guide subscribers – can
clearly see that this is simply the result of a weakened Dollar against other
currencies, making our goods appear relatively cheaper. Additionally, the report is
actually an indicator of the continued weakness of the economy, as demand for
imports has decreased for the 10th straight month. This does mean that GDP may
not fall as sharply in the second quarter as industry experts were expecting, due to
the relative rise in exports. Remember, rising exports add to GDP, while falling
imports are subtracted from it. All in all – Stocks weren’t crazy about the report,
and money moved from Stocks into Bonds, helping Bond pricing move higher this
morning.
Then the Consumer Sentiment Index arrived at 64.6, far uglier than the expected
read of 70.3. Clearly, consumers continue to feel concerned about the economy –
again, not good news for Stocks, but benefitting Bonds.
While Bonds are improving a bit this morning based on the economic report
headlines – we’re still concerned about the overall outlook for Bonds in the near
term. They have many factors working against them – overhead resistance at the
100-day Moving Average, a continued overbought state with the beginnings of a
negative Stochastic Crossover, and the relentless supply of Treasury Bonds coming
on the market that need to be absorbed. So when we have opportunities to lock
clients in at lower rates, where it clearly makes sense for them to refinance – we
want to do so and not be greedy or overly optimistic. At the same time, we do want
to try and safely squeeze as much out of each rally as we can – the recent rally is a
good example. But knowing that there are both fundamental and technical
obstacles makes this a challenging task, and it also can be a bit of a challenge for
you to relay this information to your clients…as many of them can be greedy,
searching for rates that are unattainable while risking significant savings. We’ll
continue to work together and use the illustrations available to get those clients to
make smart decisions