Waiting on earnings reports

Monday, October 22, 2007

ECONOMIC DATA / NEWS

It is a very light week for economic data.  Nothing comes out until Wednesday, and the hottest information has to be the home sales data.  More slowdowns are expected.  Although that does not bode well for the housing and credit markets, it also is not favorable to the economy as a whole.  It could put the stock market on even shakier ground.  It should push additional money into bonds.

This morning’s stock market trading is a perfect example of how the housing market is overshadowing any strong earnings reports.  Despite upbeat reports from Merck and Hasbro, the Dow is down another 60 points, after tanking 366 points by the end of last Friday.  Unless there is a glut of overwhelmingly strong earnings reports throughout the week, the stock markets will probably continue lower.

TECHNICAL ANALYSIS

Stock market losses have not worked in the favor of bonds yet, but the effects should be seen if stock losses continue.  The FNMA 30-year 6.0% is down 9bp to 100.66, probably due to some profit taking after an impressive three day run.  There was a similar movement in mid-August.  Following a major upward run over the course of four days, MBS prices took a brief dip for the next two days before pushing significantly higher.

There appears to be some profit taking in Treasuries as well.  The 10-year yield briefly traded at 4.37%, but it is now slightly up from last week at 4.41%.  The stochastics are still indicating strong downward momentum, but they are also approaching overbought territory.  Just like MBS prices, there could be a brief upward move of a couple days to a week before the yield falls again.  There is no resistance until 4.50%, but a weak stock market should prevent the yield from climbing too high.

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