Pullbacks are normal.

Welcome to another edition of Sunrise Economix, where I’m sharing the freshest updates from the housing market, peppered with exclusive insights and valuable information tailored just for you.

After last week’s 0.5-0.75% drop in interest rates, this week saw those rates increase slightly.  This is a called a pullback and is a normal event to see in the markets. This week was very light on economic news. When this occurs, the technical trading occurs. We are going to take a little time to explain what this is.  

What is technical trading? It is when markets trade within statistical ranges. There are two major types of these ranges: Daily Moving Averages and Fibonacci Retracements. Daily Moving Averages (DMA) are basically what they sound like – average closing price (interest rate) for the past X days. So, the 25-DMA is the average closing rate for the past 25 days. These DMA’s act as floors of support, making it difficult to get below, and ceilings of resistance, making it difficult to get above. Currently, mortgage rates are trading below their 200, 100, 50, 25, and 10 DMA, which is great for continued rate declines.

Here is a chart of the S&P 500 from the past couple of months:

This graph shows clearly how the DMAs work. The market was above the 25 DMA, and around July 22, it broke beneath the 25 DMA, which then started to act like a ceiling. Headed into August, it broke beneath the 50 DMA and then the 100 DMA which are now acting as ceilings too.

Fibonacci Retracements are statistical levels established by using the “Golden Ratio,” which was discovered back in the early 1200s C.E. by mathematician and philosopher Fibonacci. If you take the highest rate (call it 100%) and lowest rate (call it 0%) over a period of time, you can see that the market tends to trade between the levels of 23.6%, 38.2%, 50%, 61.8%, and 76.4%. These are called the Fibonacci Retracement levels. You can really see how they act in this graphic of the recent US 10-Year Treasury yields (rates). 

You will see that most trading occurs between different levels until economic news pushes the market into new ranges.  

Another important thing to remember about market movement is that pullbacks are not corrections. If you look at the 10-year treasury graphic, you will see that after almost every downward move, you will see a small upward move. The most important point of the upward move is that it doesn’t go higher than the preceding high points. This means the overall trend is lower. I heard it explained that this event is like someone bouncing a ball on a downward escalator. The ball goes up and down, but the rider is going down the escalator. Each “top” is lower than the earlier one, so the market is going down. This is good news for rates!

Looking Ahead:

Next week is inflation week and we will get some important economic reports:

• Tuesday: Small Business Optimism Index, and Producer Price Index (PPI-Wholesale Inflation)
• Wednesday: Consumer Price Index (CPI-Consumer Inflation)
• Thursday: Retail Sales, Initial Jobless Claims
• Friday: Housing Starts and Permits, and University of Michigan Consumer Sentiment