A couple of weeks ago, I wrote about how the majority of mutual and hedge funds have been underperforming the broad market. While I was watching television today, I heard that the leading hedge fund for the past two years was one based on mortgages. Upon doing some more research, I discovered that the majority of the top ten hedge funds were involved in trading mortgage related securities.
This led me to look and see what that market has to offer to traders and investors and if the trend is likely to continue. You can see from the above chart that we have been sideways to up in the mortgage index for many years. There is a weekly supply zone approaching soon which may turn the market. The hedge funds are nimble and have profited from both longs and shorts.
Now most people reading this article may not be able or want to participate in hedge funds. Instead, I will look to the ETF’s as a way to capitalize on the mortgage industry. As traders and pro-active investors, we can mimic the funds’ performance by buying or shorting these ETFs.
There are three ETFs that allow for trading in the mortgage markets. The biggest problem in trading them is that they have low average volume. We can still view them to see where the markets are likely to move and then select individual stocks to participate in for trading.
The ETF, MORT is also hitting a strong daily supply zone and may turn down. This would prompt looking for shorting opportunities for mortgage related stocks. The following charts are mortgage related stocks and all seem to be turning bearish or are overbought in anticipation of the end of QE and a rise in rates.
There are other influences on the mortgage industry. Having been both a real estate and mortgage broker in California, I was well aware of these and their impact on my business. The Federal Reserve’s actions and the Ten Year Treasury have a profound effect on mortgages. Learn about how to analyze the charts and fundamental influences so you can be a successful manager of your own funds.