This market is beginning to remind me of boot camp; a “hurry up and wait” market.  Waiting for what they’d never tell you, but I will. The bulls are waiting for the Dow Jones to break above last February 26th‘s -3.41% in the BEV chart below, while the bears are waiting for it to break below March 23rd’s -11.58%, and it’s apparent the Dow Jones is in no hurry to do either.

This is a difficult market where everyone is waiting for the next significant move in the Dow Jones. But it is what it is so we’d better just get used to it. What do I think the next significant move in the Dow Jones will be?  As a bear I’d like it to break below the BEV -12.5% line sometime before May; however I’d be surprised (but pleased) if it did.  As far as the Dow Jones breaking above its BEV -2.50% line for the bulls, I’d be even more surprised, however I know it could happen in our “regulated market.”

C:UsersOwnerDocumentsFinancial Data ExcelBear Market RaceLong Term Market TrendsWk 545Chart #1   DJ BEV 09 Mar 09.gif

The problem with this market is that it has little to do with economic fundamentals. Politicians and the mainstream-financial media have been successful in connecting the advancing stock market with “economic growth”, and “economic growth” with “government policy” originating somewhere in the minds of the “best and brightest” employed by Washington.  As it is, seeing the market deflate is a signal for Washington’s “market regulators” to do whatever is necessary to keep those valuations inflated. This is especially so during election years such as 2018.

However, one of these days this will prove to be a mission that was doomed to fail. For one thing interest rates are once again rising. It’s no secret interest rates, like stock valuations, have being managed for decades. But the following chart shows that something has changed.

Look at the highlighted area from January 2008 to January 2017, where mortgages rates (Red Plot) were lower than Barron’s Best Grade Bond Yields (Green Plot). If you study what happened during the 2007-09 credit crisis, mortgage rates gapped far below Best Grade Bond Yields. This was during a time when the secondary-mortgage market, a market that once traded trillions of dollars in mortgages actually went no bid during the crisis, and shut down, never to reopen for lack of buyers.  

Logically, mortgages rates in 2008 should have gapped up above 20% to attract buyers back into this market, but that would have made the single family mortgage (and home prices) collapse. As “policy” would never approve of that, something had to be done.

What made mortgage rates decline below bond yields was the Federal Reserve supporting the mortgage market by purchasing mortgages at price far above those a free market demanded, and in such volume that mortgage rates for nine years were below Best Grade Bond Yields. Years ago I called it the Dumb and Dumber market and so included the Jim Carrey and Jeffrey Daniels movie poster of the same name.

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