bull-bear-market-austin-smallDecember Pending Home Sales hit the tape: plus 6.3%, printing the index at 87.7. This was the highest reading since September 2008. Economists were expecting the index to come in at 82.3. Pending Home Sales rose in areas where affordability conditions improved such as the South and Midwest. The West and Northeast posted negative numbers.

Post data, bonds and mortgage backs slumped while the Dow and NASDAQ has seen modest gains. More than anything, trading has been in the doldrums or on hold due to the lack of direction on Capitol Hill with respect to additional stimulus packages and tarp money. With the Fed the only buyer of Mortgage-Backed Securities, days like yesterday produced a little rally while no Fed today sees MBS slipping away.

Interesting news in Dallas paper today (front page) and I’m sure in a number of papers across the country on expectations for mortgage rates going to 4.0%, given the new stimulus package. Not to say this couldn’t happen but ask yourself, how much can the Federal Government buy in MBS and for how long to maintain interest rates in the low 4’s? With most other investors shying away from MBS (especially the Chinese since the Treasury Secretary and VP ticked them off), the Fed will have to go this alone. I’ll take the other side of that trade, betting against any sustainable program. For now, we need to be satisfied with rates in the low 5’s to high 4’s. A year ago, people would of stole to get that interest rate.

Currently, the 10 year note is down 26/32’s (yield 2.81%), mortgage backs are off 6/32’s, and the Dow is up 47 points in quiet trading. Although the selling today has taken the market back to recent lows, the power of the sell signals and daily oscillators is waning. In other words, the bears are running out of gas. Given that assumption, we would expect a supportive range trade (mortgage pricing getting a little better) into Friday’s Payroll number.

By the way, that number is expected to be a woofer.