MBS Live Day Ahead: Let's Try This Again: It's a Tradeflow-Driven Market
What is a tradeflow? We have a primer that attempts to answer that question on MBS Live (this one), but even after reading that multiple times, you wouldn't be alone in continuing to view the topic as esoteric, confusing, and perhaps a bit frustrating.
One problem is that "tradeflow" isn't the perfect word to define what we're attempting to define in the primer. There really is no single word for it. In general, for our purposes, it's a catch-all term that broadly refers to all the trading that's taking place for reasons independent of motivation from conventional cause and effect (e.g. economic data and news headlines). Here's an excerpt from the primer:
[Tradeflows] aren't only important for the traders who are actually opening and closing their own positions, but also for every other trader interested in a particular market to observe and get a sense of what's moving money! Tradeflows themselves can be the result of preferences, assumptions, insights, ideas, and goals on the part of human beings. They can be the result of necessity, balance-sheet constraints, legal issues, portfolio allocations, and liquidity needs on the part of large firms. Or they an be the result of technical and algorithmic trading that seeks to capitalize on trends, continuation/reversal signals, and even complex systems that consider other market levels and news headlines.
I hate it when tradeflows are dictating market momentum, because they're largely an "unseen hand." There's usually not much to cite when it comes to chalking movement up to tradeflows, and there's usually at least some amount of guesswork and deduction involved. It's definitely art over science. Still, it's artwork I only share when I'm confident about its role. And right now, I'm confident about its role.
Fortunately, we have several pieces of hard evidence to point to (not always the case!). First of all, and most obviously, Tuesday's volume was higher than Wednesday's, even though the calendar of data and events would suggest otherwise (nothing major on Tuesday vs 5yr Auction and Fed Announcement on Wednesday). Then on Wednesday itself, the biggest volume spikes of the day occurred in the wake of block trades and the 3pm CME close (as opposed to the Fed announcement).
Granted, the Fed announcement drew out more volume in the ensuing hour, but in terms of the biggest pops of volume, they were unequivocally tradeflow-driven. This isn't always the case. We can't always look at the CME block trade screen and see that 2 big trades hit right at the 9:17am volume spike, and subsequent spikes don't always occur at the 3pm close (thus suggesting a rush among a certain portion of traders to balance positions before the end of their trading day).
What's the bottom line here? First of all, and sadly, yesterday's post-Fed rally was more a factor of the churning of Tuesday's tradeflows. There wasn't much justification for the rally in the Fed Announcement--at least not enough to challenge the resistance zone centered on the 200-day moving average at 2.29, or better yet, the 126-day exponential moving average at 2.275 (126 days is exactly 6 months in terms of business days, and I prefer it to other rounder-numbered moving averages when it comes to keeping an eye on broad momentum).
That means the only clear signal we've really received this week is that the push back against the late June ECB taper tantrum trade is officially over. That possibility was still on the table as of Monday morning. From here, we're waiting for new inspiration. It could continue to come from tradeflows unless something more compelling steps up to the plate (political scandal, inflation data, geopolitical headlines, ECB developments). Either way, yesterday's post-Fed rally wasn't a post-Fed rally at all--just a correction in tradeflows that has now dovetailed into resistance levels being reinforced this morning.