Wednesday 7/30 ... In A Yellow Wood

By: Matthew Graham •

Two Roads Diverge before us now.  We have recaptured the gains we lost last week.  This is as we had hoped.  But a +9000 reading on the ADP, loathe though we may be to put any faith in that report, must at least give us some measure of pause in hoping for a weak reading in NFP on Friday.

Today's Numbers

  •  6.0's started around 100-00, dropped to 99-28, and progressively rallied to their daily plateau at 100-07 bid / 100-08 ask
    • The visual of this is on the graph from earlier.  No  up or down movement after that one.
  • 5.5's followed a similar trajectory in their price range ending at 97-19
  • 6.5's same and ending at 102-15.
  • Dow Gained 186
  • S and P Gained 21
  • Oil was up about 5 bucks
  • And treasuries had about a break even day (chalk the spread strength of MBS up to the housing bill passing, but not because of the housing component, but rather the GSE component)

The News

 

  •  ADP private payrolls
    • Added 9k. 
    • There is not usually an analyst consensus on this report, but certainly the gain was not expected.
  • Mortgage Applications
    • Dropped to the lowest level since '02. 
    • Not a big surprise here considering that analysts were forecasting this to be slightly better than it was owing to lower interest rates, but as an artifact of the time frames of the data collection, those of you at ground zero know that we haven't really had much rate improvement.  Factor in the increasing guideline restrictions, credit score based adjustments, etc..., and there is not a very timely way for an analyst to know that lower rates have not necessarily represented lower cost recently.
  • George and Bill
    • Bush signed the housing bailout bill into law
    • What a fastrack for government action!
    • Again, the SPEED perhaps even more so than the CONTENT served to bolster some reassurances that Fannie and Freddie are protected by ancient and powerful enchantments cast in secret long ago by the government's phoenix feather wand.  How does that spell go again?  Something like "Guaranteeus Implicitus!"  Yeah, i think that's it.  (8th book J.K.?)

The Bottom Line

With current coupons (in other words, the coupons with the most buying and selling, aka 6.0's right now) being fairly close to PAR at 100-07, and with the 6.5 being only 2-08 away whereas the 5.5 is 2-20 away, one might assume that there is a slight bias towards buying "up in coupon."  the rising rates of June and July have certainly created more interest in the higher end of the stack.  Indeed, the farther we go down on the stack, the quicker the prices drop off.  The question is whether or not this is "momentum" or "turning point."

Look at the quandary with ADP as a guide: it's hard to find people that put much stock in this as an indicator of NFP, yet the markets can't seem to ignore it when it deviates greatly from expectations.  Plus, it's one of those things where everyone SAYS it's meaningless, but how could one help but wonder whether or not this will be the month where it is predictive.  Regardless of the negative buzz, it impacts trading decisions.  The question before us is whether or not it is an omen or just more smoken mirrors.

Perhaps the most difficult part of this whole "will the data be strong or weak" debate is that NFP is already forecast at a relatively high loss of 72,000.  On occasion, we could have stronger than expected data, a 50,000 loss for instance, and things could go either way simply because a "better than expected, but still historically crappy" number will remain open to debate.

Consider too that many times in the past when we have been sitting on a Wednesday and the market's focus seems to be on Friday, that unexpectedly deviant scheduled data or an unforeseen "tape bomb" shows up on the Thursday with momentum and perspective altering importance.

As far as technicals, there are multiple reads.  The beauty (sarcasm) of technicals is that depending on which ones we use and how much of the data set we include, they can disagree with each other.  If we get a fairly slow day tomorrow, I will take some time and post 4 or 5 different technical studies with graphs so that you can see the differences.  In short though, the candlesticks that some folks are so fond of have conflicting readings depending on how you WANT to see the data.  As far as moving averages we are right at a crossing point with no clear indication as to whether we will "bounce" off the ceiling or break through it.  Then there's the Fibonacci retracements, fan lines, Bollinger bands, RSI, Elliot Waves, and others.  All voodoo magic, with the caveat that it's magic that sometimes works!  One of the most reliable Technicals shows a mixed reading depending on the time frame you choose for your data set.  If I were forced to make a conclusion I'd say it is certainly reading bullish "some time soon."  But "soon" might not be Friday.  We might even have to wait a month!  (unlikely, but depends on inflation).

Whatever the case, our two main methods of forecasting: fundamentals and technicals, can both be interpreted in different ways right now.  As such, history shows it's usually been a safer call to lock on a night like tonight.  Whether or not you should do that depends on your time frame, risk tolerance, and visceral assuredness of the market direction.  Do you KNOW in your heart that NFP will break 100k on Friday?  If so, float.  Or are you starting to buy the buzz that stocks are set to rally and "the recession is over!"  (seems like a big leap to make on a housing bill and some ADP data).    The longer your timeframe to lock, the lower the chance you can go wrong with either road.  If you need to make a short term decision though (under a week or two), you'll have to play it according to your risk tolerance, with the shortest term risks favoring locking, but all others favoring floating.  Indeed, the overall impression from technicals and fundamentals would indicate that rates should be improving.  But after ADP today, and some of the "new" sentiments emerging on a potential stock rally, two paths emerged.  Hopefully whichever one you choose makes all the difference (in a good way).

MAJOR CAVEAT: it is entirely possible for us to have a sort of "sideways" day tomorrow and be able to put off this decision until tomorrow night, thus possibly being able to make it with more information.  But GDP, Jobless Claims, Inflation report, and NAPM are not the kinds of things I'd make that assumption about.  The risk factors say "float," but the SIZE of those risk factors perhaps should scare some of us enough that we should lock.