Rates have been going up, but why is that and what will happen next?
Many of you have noticed the stock market has been on a tear. As investments are drawn from the Bond market to chase gains in the hot stock environment, pressure is being put on bonds. The Fed has been buying bonds, which has kept rates from going up more than they otherwise would have, which has helped but rates are still on the way up.
However I don’t see this stock trend continuing for too long, there is a technical correction to the stock market that is more than overdue. The level of bullish sentiment now stands at 57% – a dangerously high number for stocks. When a large majority of traders are bullish they are already in the market. This scenario leaves few investors to come into the market with new buying to push prices even higher.
With the DJI at over 14,000 stocks are within striking distance of their all-time highs, it’s important to see why these levels can be dangerous.
See how the past two times stocks have approached these levels, it has been followed by sharp moves lower. Also notice that these occurred after long, extended moves higher. Stocks are now in the third extended run up to these levels. Going even further: the current 500+ day period without a 10% correction is one of the longest in the Stock market’s history.
While history may not repeat itself it usually does and I feel the chance of a long overdue correction is about to happen any day (it may have already by the time you are reading this), all of these factors tell us that a major drop in the stock market is near..
And (of course) I’m not the only one to recognize this. This means that some investors will be heading to the exits before the grand finale. Once the selling starts it will accelerate, quickly!
If (when) this happens where will all that capital go from the sale of these stocks? Yep, it almost certainly will flow back to the bond market, improving interest rates. Now there is no guaranty this will happen, and rates may get worse before they get better, but the writing is on the wall. This would essentially be the first time all of these factors presented themselves and a different result came to be from them if the stock market doesn’t have a major correction soon.
Mortgage Planner – 16 Years Experience