Bonds Rule

Special Edition due to the late day sell off in stocks (and bonds). Tomorrow we will post our full edition.

Market Action:
Tuesday showed some remarkable volatility and, in the end, the market lost some ground, for the Dow that was about 130 points. The market opened down slightly with the Dow losing about 60 points in a few minutes. Those losses widened to about 100 points a couple hours into the session.

From those lows, the Dow rallied back from that down 100 to up about 25 with two hours to go. From there we saw selling into the bell with the market falling on pretty high volume. Overall, the total volume on the day was not spectacular but much better than Monday’s by some 300 million shares on the NYSE.

Housing:
One news item caught our eye as foreclosures were announced to be up 90% yoy (year over year) from May to May and 19% above April. What do you think, is the housing problem bottoming out? Our opinion remains the same, more trouble in the American Dream for many.

Bonds:
In what is surely to be more bad news for housing, bonds continued their slide with 10 year Treasuries yielding nearly 5.3% (five year highs) after the quarterly refunding on Tuesday. In March this rate was just above 4.4%. The mortgage rates are closely correlated to 10 year Treasuries so you can imagine that mortgage rates are almost a percent higher than in March. This rate increase will put more pressure on an already troubled housing market.

Opinion/Analysis:
As the title says, we think that this past week, “Bonds Rule”. Higher interest rates seem to be putting the brakes on the stock market rally that we have seen for over four years. Tuesday’s momentum seems to be down with our momentum indicators near oversold levels for the first time since the February stock swoon.

This down day did have some February feel to it as the midday rally lost its footing and sellers came in going into the close. Bonds are forcing leveraged players into some tough corners, selling is the result.