Last Week in Review

YOU KNOW WHO IS LOOKING FOR STOCKS? NOBODY! Last week's volatility in the stock market stabbed at the hearts of both the Stock and Bond markets, with home loan rates swinging higher and lower throughout the course of the week. Economic news releases took a backseat to the massive movements in Stocks. Amazingly, when all the smoke cleared, home loan rates were unchanged to slightly improved for the week overall.

What happened? First, remember that the Stock and Bond markets compete for the same investment dollar. This means that when Stocks are worsening and investors are selling off their holdings, some of that money gets moved over into the Bond market, which helps home loan rates improve. And vice versa, when Stocks move higher and investors are buying into the Stock market, some of that money comes back out of Bonds, which causes home loan rates to worsen.

Last week's volatility began with the Chinese Stock market plunging, setting off a string of worldwide stock selling. Our own Stock market was ripe for a reversal lower, and money flowed out of Stocks and into Bonds, helping home loan rates improve. The next day, Stocks began to rebound, moving money back out of Bonds and causing home loan rates to worsen. But the "see-saw" action continued for the balance of the week - and may not be done yet, causing high amounts of volatility in Stocks and Bonds - and therefore, home loan rates.

AND ALTHOUGH WEARY INVESTORS MAY NOT BE LOOKING FOR STOCKS...MAYBE THEY ARE LOOKING FOR A NICE NEW CAR THIS SPRING. IF YOU'RE IN THE MARKET FOR A NEW VEHICLE, DON'T MISS THIS WEEK'S MORTGAGE MARKET VIEW.

Forecast for the Week

So what's the story with the Stock market? The increase in volatility, and even the recent decline, is actually perfectly normal. The steady seven month climb we have seen in Stocks was unusual, and the current 1000-day streak without a 10% decline is the second longest in history. So looking ahead, it would not be a surprise to see Stocks find their way even lower over the near term, before regrouping and making another run at new highs. The fact that outflows from Stocks are being "parked" into Bonds is a long term plus for Stocks, due to the temporary nature of this trade. This also tells us that Bonds and home loan rates will be a short term beneficiary, but will be adversely affected once Stocks start to rebound.

This week holds only one potentially major market-moving economic release, the February Jobs Report. Initial estimates are calling for the creation of 100,000 new non-farm jobs, down from January's report of 111,000 new jobs. The chart below shows some mixed signals for Bonds, with a nice "rising pennant" formation - typically good news for Bond prices and home loan rates; but also shows that Bonds are "overbought" and ripe for a reversal lower. For now, the technicals will take a backseat at least until Friday, as Stocks seem to be driving all the action for Bonds and home loan rates.

Chart: Fannie Mae 5.5% Mortgage Bond (Friday Mar 02, 2007)
Japanese Candlestick Chart