March 14-15, 2009

Stocks racked up their best week since November with a four-day rally from extremely oversold levels as major indices rose about 10%. Coming off a closing bottom on March 9 of 6,547 in Dow Jones Industrial Average terms, the Dow closed Friday at 7,224. That is still below the Nov. 20 closing bottom of 7,552, which now serves as short-term overhead resistance for the current rally. Stock indices are still down about 18% for the year and down about 52% from their all-time high in October, 2007. Nothing in the technical action suggests that heavy selling is over or that a bottom has been put in, however.

Although money moved back into stocks for the week, investors did not abandon Treasuries and mortgage-backed securities as the 10-year Treasury closed at a yield of 2.89% and mortgage rates held steady in this historically low range.

Treasuries and mortgage markets started poorly in Friday morning trading, however, after comments by China had some traders believing the Chinese may begin to sell some of their massive holdings of U.S. debt. Since the Chinese hold about $727 billion of U.S. debt, or 6% of total outstanding debt, a selling campaign would drive prices lower and rates higher. This is the scenario I have persistently warned about for more than a year (if I say this long enough, I’m bound to be right some time!) which forces Treasury to hike rates to attract money to fund the federal debt, and that will signal the end of this historic run of cheap money. That’s only an opinion; of course rates will rise at some time---we just can’t predict when, and weakness in the economy is serving to hold down mortgage rates and fuel a refinancing boom.

The Federal Open Market Committee meets next week, and that line from the old Chubby Checker song, “Limbo Rock”---“How low can you go?”---is no longer valid as the Fed rate is already 0% for some lending and .25% for other instruments. Instead of handicapping the odds of a Fed move by a certain amount, market watchers will be listening for post-meeting comments or any new plans to bolster financial liquidity or boost the economy.

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...by Gary Moore

Cell: 615-579-8658 Toll-free fax: 866-321-6513

"True individual freedom cannot exist without economic security and independence. People who are hungry and out of a job are the stuff of which dictatorships are made." - Franklin D. Roosevelt

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(0% points, 1% origination, subject to program and lock period. Market Update informs on market trends and is not a quote for a unique borrower.)

Posted by Gary Moore on March 14th, 2009 1:41 AMPost a Comment (0)

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