MBS CLOSE: Stock Slide Continues. Mortgages Rally Into Close

Earlier in the afternoon, we mentioned the sudden onset of selling in the stock market in conjunction with the high level of connection in the stock lever with Tsy's.  And although even then, we didn't expect Tsy yields to follow stock prices into the abyss, the continued weakness in stocks was certainly enough to leave tsy's well off their worst levels of the day.  Due to ongoing light supply and ongoing Fed presence, MBS were able to stage a bit stronger of an afternoon than tsy's, riding their previously noted trend channel perfectly into the close.

Though not pictured on the chart above, 3.62 has been the subject of much attention lately in the 10yr yield.  But perhaps the dual triggers that should be more closely watched going into tomorrow are those that actually ARE pictured: 3.6072 and 3.64.  After overnight strength wore off, Tsy's rallied exactly to this level EVEN BEFORE data came out.  During that same time, stocks had opened lower.  When confidence came out better than expected, stocks rallied from 1091 in the S&P almost to 1100 even. 

Tsy's, on the other hand experienced only a minimal change after the data.  Even so, the did move marginally higher, and it's here that we see the significance of 3.6072 as it proved to be resistance not only immediately following the data, but once again at the end of the day.  Crossing that level on any bullishness tomorrow would be a good indication of strength.

Conversely, 3.64 on the high end is just as significant.  Granted, it didn't exhibit the same amount of relevance today, but over the course of the past several days and even weeks, this level comes up again and again.  Having supported the market against further weakness almost all day yesterday, yields weren't that far off at their weakest point today either.  So just as 3.6072 serves as a good indicator in a rally tomorrow, a meaningful break of 3.64 could be cause for concern. 

Closing at 100-31 makes MBS 5 ticks better on the day and as you'll see in the chart below, keeps them above the inflection point from mid-december.  Tsy's are ALMOST in the same boat, but instead of drawing a clear line in the sand, they're "hovering" around their technical pivot.

If it seems odd to see MBS with the ostensibly better technical behavior, that likely has much to do with the fact that MBS' inflection point is very near 101-00, which tends to hold a bit more power to technically motivate prices around it. And tsy's themselves are certainly not without the ability to put on a great display of adherence to technical trends.  Since jumping the shark in mid December, tsy's took a few brief sessions to get their footing and have since, been steadily marching back to better prices in Tsy futures.  And this of course, could all be at moot point without a meaningful assault on 119-00, which looks miles away in the context of the very narrow trend channel below.

Rounding out the sense of "restored equilibrium" and "fence-sitting" ahead of important data, stocks, for a third day now, continue to do battle with very important levels in the S&P.  Long story short, the huge losses over the past several sessions have carried the index back to the lower extremes of it's year end range.

We can see plenty of good support underfoot though, so it would have been a bit of a surprise to see the "freight train" move very off off it's tracks ahead of big data.  We will point out, however, and already suggested this last night, that even a positive reading in the Consumer Confidence report would fall largely on deaf ears as it would have had to have been immensely better than expectations in order to break out of its own set of railroad tracks.  So as the rest of the world is beaming about the multi-month record in confidence, don't lose sight of the big picture.  Here's yesterday's chart.

Confidence not only did not reach the yellow line, but didn't even break out of the red range.  No wonder that provided a nutritious medium in which fear, doubt, and uncertainty could reproduce like so many paramecia.  Let's just hope they develop a large enough of a colony by tomorrow to drive sufficient flight-to-safety demand for the $42 bln 5 year auction.  But even $42,000,000,000 in 5 yr treasury notes may not be the headline of the day a mere hour and change after auction results are announced.  At or around 2:15pm, it's Ben and Co. with their latest FOMC statement.

That there is likely no change to benchmark rates is almost a certainty, but of much more interest will be any changes to their verbiage regarding their exit from MBS purchases, in addition to any hints at impending inflationary controls.  After the market's close, the State Of The Union address will take place at 8pm, but that's way past my bed-time, so I might tune out on that one.  Others, however, may want to tune in as some chalked today's stock weakness up to the a potential hearing on the Presidents recent banking proposal by the senate banking committee.  So although AQ and I aren't fond of discussing politics, it's a component of recent trading that can't be ignored altogether.  (but we promise to try our best!)