The old saying, “Loose lips sink ships” is prescient when it comes
to the financial sector. The Fed’s
ill-advised statements about tightening its monetary policy this spring led to
a major spike in Treasury yields, which has all but torpedoed the bubble in
income-oriented investments. The yield
spike has also begun to put cracks in the real estate recovery, as witnessed by
the 13.4% plunge in new home sales for July reported a few days ago. Higher mortgage rates are beginning to bite
into potential homeowners’ pocketbooks.
The spike in Treasury yields has had the biggest impact on
interest sensitive areas of the financial market and the economy as we have
seen recently. As reported by
Briefing.com, the weekly MBA Mortgage Index
remained in a downtrend with Wednesday’s 2.5% fall marking the fourteenth
decline out of the past sixteen readings including last week’s 4.6% slide.
In yet another sign that rising interest rates
are taking a toll on the real estate sector, pending home sales on Wednesday
were reported to have fallen 1.3% in July, worse than the 0.2% increase
forecast by consensus and below last month’s decrease of 0.4%.
Earlier this week it was the Administration’s warnings to Syria
about the potential for a military action that led to an increase in stock
market volatility. The Dow Jones
Industrial Average dropped shed 170 points on Tuesday while the Volatility
Index (VIX) spiked over 10% in reflection of the increased level of fear and
uncertainty on Wall Street. Granted the
VIX is nowhere near as high as it has reached in previous market sell-offs, but
the latest spike indicates that a healthy level of fear is returning to the
market place.
What all of this illustrates is that the market is currently
sensitive to loose talk by officials.
Such a climate is typical of an environment where the cycles are in the
peak phase, as we’ve seen in recent weeks (with three consecutive short-term
cycle peaks in August). In other words,
an internally weak market is extremely vulnerable to negative headlines. This isn’t the case when the market is
internally strong, as evidenced by the new 52-week highs and lows. [Excerpted from the Aug. 28 issue of Momentum Strategies Report]
