Making Metrics for Reaction to Market Bounces

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A few months ago, many traders had an overly rosy outlook for their plans heading into 2016. Economic data remained strong, allowing for opportunities until things finally started to slow down. That was before the equities market took a hit, before oil prices dove steeply, and before China’s stock exchanges took a hit. Now those same optimists are buying bonds and getting their funds out of risk markets.

We see everything 20/20 in retrospect, but the current shakeup seems fairly obvious when considering the conditions: The Fed boosted interest rates, the dollar got stronger as a result, and commodities took a hit.

Now just about every area for investment seems like a scary suggestion. Those dealing with Mortgage-Based Securities are looking for simple advice as to what to do next. Unfortunately, there is no simple advice. The market has been wonky so far during 2016, and a bigger trend seems to be taking off. What it is could be anything. The soundest advice anyone can offer right now is to stay aware and keep an eye on the market and react accordingly.

One option is to figure out a metric and base your reactions on it. For example, Matthew Graham of MortgageNewsDaily noticed that 10-year Treasury yields have been pushing against their lower Bollinger Band—a market tool used to indicate volatility—for six sessions. He pointed out that bounces occur frequently enough and many, including the one that occurred January 11, don’t suggest anything definitive. He suggested that observers could separate a “definitive” bounce from a more mundane one by noting whether it surpassed the middle Bollinger Band. If that happened, theoretically, a trader might take more defensive action with regard to locking and floating rates.

You can develop your own predictive formulas or simply stay vigilant.