MBS CLOSE: Revisiting the Summer Theme
We're finally getting enough confirmation to begin to question the summertime range. How appropriate that the successful retest of recent highs comes on the first day September...
If you've been here for one of the frequent discussions on technical analysis or even on the concepts of trend, you might already be hip to the jive that, although the actual metrics are objective to an extent, prices need to not only break through whatever sort of "floor or ceiling" one happens to considering, but also do "something" to confirm the legitimacy of the break. The "something" is the matter of subjectivity, but my own standards of 2 days closing at least 3 ticks over resistance is probably fairly mainstream in the analytical realm. So where do today's gains leave us?
Recalling then that our magic upper price level had been somewhere in the neighborhood of 100-11, yesterday and today look pretty good eh? Although it is interesting that when prices fell below that level early, they encountered their first major ceiling of the day at 100-12. I think 100-11 is the more appropriate level due to its prominence 2 weeks back, but 100-12 saw it's share of action during the past 6 sessions that have marked the breaking of this range.
- Prices rally right up to 100-11 at close
- next session, tons of volatility as prices decide which side of resistance they'll land on.
- by close they were under resistance yet again.
- the technical analyst would see #3 as the cause for #4 and come as close to disregarding GDP, jobless claims, and stocks as the culprit for that selling. From this standpoint, it was the logical reaction to the failed test of the resistance ceiling. Maybe some combination of that voodoo black magic and fundamental analysis is most accurate.
- prices retested the ceiling mid-day and failed again.
- see #4 above. same logic. failed retest - prices go down.
- ceiling broken WITH SIGNIFICANCE yesterday (this is half of what we mean when we say "by a significant amount and for a significant amount of time." Look at the 26th by comparison... Doesn't really look that significant eh? But closing 3 ticks higher than resistance meets the criteria.
- So as opposed to selling off today on a failed retest. we rallied in CONFIRMATION of the break. And yet again we've closed over resistance by a significant amount (significant in this context by the way, does not mean "large" but more like "not insignificant." That's litotes by the way, in case you're thinking of an english degree).
All of the above are casting a vote for the end of THIS PARTICULAR range-bound epoch in MBS summer history. But IT'S IMPORTANT TO REMEMBER THAT MOST PRICE RANGES IN THE MBS MARKET ARE NOT IDEAL CANDIDATES FOR TECHNICAL ANALYSIS! Why? The easiest way to give a short enough explanation for today is to say that treasuries and moreover treasury futures, represent a more unrefined, unadulterated, and naturally occurring form of fixed income. They're pretty much just cash. They're the benchmark. They're the vanilla. They're the 4 cylinder automatic Camry.
Because of all that, they lend themselves more readily to technical analysis as they're more likely to coincide with broad concepts of "flight to quality," and investing in "debt" as opposed to "equities." MBS add layers of complexity to the sector that makes their prices, at best, a derivative of treasuries using "spread" as the risk sentiment indication. So the more primal movements in fixed income will usually be most reliably foreshadowed by big brother treasury. This is what we mean when we say things like "well-behaved," because it's noteworthy when MBS give nice technical signals that we'd normally expect from treasury futures.
All of the preceding now intimately understood and committed to memory, there is a bright side to all of the doubt we've just cast on MBS. If we know that treasuries are the preference for analysis, and we know that MBS trade in a spread to treasuries (or whatever....), and we have past, present, and estimated future knowledge of spread behavior, we can still look at MBS in a technical framework under certain conditions as long as we are cognizant of the underlying technical forces at play in the broader bond market.
Well said MG...
(No MG is not talking to himself, this is AQ now).
I will keep it short and sweet. In MBS OPEN we informed that we were targeting 3.36 on the 10yr and 3.26 in the event of a facemelter. There really isnt much magic behind these levels, they are simply previous yield lows made over the course of the summer. 3.36 was our target because it is 1bp below the August yield low. 3.26 was our next target because it was 1bp below the July yield low. Given the fact that we are venturing into technical analysis no man's land (not much previous price action to analyze at these levels)...this is what we feel will guide the marketplace in the short run.
That said...a break below 3.36 would likely lead rates towards 3.26.
The bond market has held up quite well against better than expected economic data and ongoing supply.
Since hitting early August highs, hasn't it felt like bonds have had a mind of their own? At times the stock lever has been influential over the rates market...but doesn't it seem like TSY have ignored the up days in equities? Only taking directional leadership when stocks sell... benefiting from a flight to quality. (I HOPE YOU ARE SAYING...YES THAT SOUNDS RIGHT!!!)
You should remember the following phrases... "lack of logic" and "fundamentals are phooey".
Plain and Simple: TSYs have been patiently awaiting a stock sell off. Ignoring the up days, fading ("fade" = market term for betting against the expected reaction) the better than expected data releases....staying at the ready for weakness in equities. Stocks have started the process (again), now we need confirmation, not another bounce at this oh so important pivot point.
Here is that oh so important pivot point in stocks...BANG BANG BANG!!!
We are ONCE AGAIN at an INFLECTION POINT. Non-farm payroll data prints Friday. The market goes back to work after Labor Day. Before believing this rates rally is real...we must receive confirmation. Confirmation that the ongoing optimism in equities from March to Sept was nothing more than a bear market rally.
So, although the market is very much at a pivot point(AGAIN)...we must remind: Until confirmation is provided...FLOATING REMAINS SUPER RISKY
That's right. We remain defensive. We've been this close to confirmation several times over the course of the summer session...yet we waited and waited....and it never happend! Stay defensive until the S&P breaks 970...
Now that you have both the technical and fundamental reasons to wait for confirmation, its time to revisit the summer theme. Yeh.......
Its a Trader's World. We're Just Living In It
PS...servicers will wait for rates to drop another 15bps before buying "rate sheet influential" MBS. Servicer buying will serve as confirmation for MBS...
GOOD NIGHT
-MG and AQ