The Great QE2 Railroad - Uncertainty Masks Reality
Railroaded... Now there's a good figure of speech, and one that is better defined by examples that by the dictionary. Webster says: " a : to convict with undue haste and by means of false charges or insufficient evidence b : to push through hastily or without due consideration." But that just doesn't do it for me... I would probably want to involve the term lemmings in my definition, maybe Chicken Little, any number of historical examples of destructive and unwarranted groupthink, and almost certainly, the first two weeks of November 2010 with respect to QE2.
It's a topic whose centrality is quickly becoming comical. Indeed there are other things happening in the market these days, QE2 merely being one of them, and not necessarily even the most important! Moreover, it's uncanny ability to evoke newly appointed experts on the macroeconomic effects of unprecedented Fed policy is not helping. If there's one thing you could hear from someone bold enough to pretend like he knows what he's talking about, it's this:
"Notwithstanding the fact that there are other factors affecting the market to varying degrees which are completely distinct from QE2, we absolutely don't have enough information to a)scapegoat the policy as the root of all evil, and b)decide if the market-based effects of the policy are even important enough to deserve half of the attention it's getting."
If anything should be railroaded and/or demonized as having a negative effect on our rate-sheets, it's UNCERTAINTY. And in fact I WILL grant you that the onset of QE2 is at least partially culpable in the proliferation of one of the nastiest bouts of uncertainty in the past 2 years. But as far as QE2's involvement in that uncertainty, market participants are--well....--certain that issue will be resolved. In other words, we're waiting for shoes to drop, knives to fall, bleeding to stop (unrelated to falling knife accidents), and a stable base of relative positional equilibrium in bond markets from which to trade the effects of QE2 and to a much greater extend everything else going on in the markets into year end and beyond.
Evidence for uncertainty? sure.... Remember that "stock lever" thing? You know.... Where bond yields tend to follow stock prices? (falling bond prices coinciding with rising stock prices). At first glance it might seem like the following chart is showing the stock lever WORKING. But in fact I switched what would normally be the 10yr YIELD line and replaced it with PRICE. So in general, yesterday and today have seen the OPPOSITE movements from those of a working stock lever.
WHEN UNCERTAINTY WAXES, DISPARATE SECTORS HUDDLE CLOSER TOGETHER, WAITING FOR THE UNCERTAINTY TO BE RESOLVED. Some convey this notion with balls in the air, dropping shoes, falling knives, "money moving to sidelines," or what have you, but the methods of definition are not important as long as you grasp the thing itself. Uncertainty... Market participants are waiting (in general!).
SO EXPECT AN EBB AND FLOW OF PRICES IN A GENERALLY DOWNWARD DIRECTION UNTIL THAT BASE OF STABILITY HAS BEEN ESTABLISHED!!! It could be today, it could have already happened around the 2.95 level in the 10yr, or it might not happen until the 3.06-ish support levels. The more time that passes with particular levels showing technical significance (for remember! technicals also get heavier nods in times of uncertainty), the more convicted we can afford to be about setting up "base camp" there.
Back to today's business though... I know you must be curious about these 2.95 levels I just mentioned. And of course, this isn't to say the the bleeding has definitely stopped, but it is nice to see a technical show of support smack dab on yesterday's high yield levels. Incidentally, the lower red line highlights the trading around an intraday pivot point: a hallmark of uncertainty that we'd probably be wise to consider any time a price or yield line is approaching a prominent high or low from the previous day (did that make sense? Let me know if not and we'll get deeper into it).
Sure, it is entirely possible that the chart above contains the "double top" from which yields will rally, but I wouldn't make any short term bets on it (even though I very well might make long term bets that 10yr yields dig back down into the 2's... Just not sure this is the top or how long it will take to find it). One thing that definitely needs to be seen from a technical standpoint is for yields to break through the extremely pertinent ascending resistance line that has been dominating the sell-off. Looking at the following trend-line, it's no wonder we've heard the last few weeks referred to as "an orderly backup."
Who knows... Perhaps by the end of the day, it will be our pleasure to report that this line has indeed been broken. whatever the case, it does look like 10yr yields are giving it quite a bit of thought (I'm looking at this same chart continue to grind into that white line as I've been writing). By the way, a break of this line could lead to some more fast paced movements later in the day (and in a direction we might actually enjoy).
MBS meanwhile, are taking the opportunity to do--well--not much of anything. 3.5's are very thinly traded, up just over 3 ticks at the moment, while 4.0's are up just over 1 tick at 101-09.
But just as treasuries must contend with their ascending resistance to their yields, MBS have a similar struggle with a relative mirror image
The trend channel used here to show the relatively orderly sell-off we've seen.
1. the first time since qe2 where the channel was tested, prices immediately corrected and headed to the opposite end of the channel (very technical move, and indicative of uncertainty)
2. indeed prices made it all the way to the other side of the channel. After the cold bowl of porridge on the morning of the 15th, this bowl proved too hot.
3. So prices quickly dialed back down that metaphorical temperature as low as they could without it being "too cold."
Ha! Maybe it's that elegantly simple... Maybe not... But as long as the crowd at your next cocktail party doesn't read this site, I'm sure you'll be able to keep conversation going with some printouts and a few drinks...
To conclude (for now), so far, so stable as we approach the 3pm marking. We'll be here to help decode any drama, should it choose to rear it's ugly head after 3pm. Even without it, there is a lot going on in the markets right now NOT related to QE2 that we can/should discuss, but I wanted to step up on the trusty old soap box for a few minutes and spew my anti-inflammatory rhetoric. Hmm.... Anti-inflammatory you say? Excuse me, I think I'm going to go try to sell Advil a script for a new commercial I just came up with...