MBS Live Day Ahead: Room For Strength; Room For Weakness

Technical analysis is an important ingredient in most market-watching recipes--at least when it comes to those who are compelled to watch markets most every day and who may be compelled to take action based on intraday market movement.  Here's what I mean by that:

Someone like Warren Buffet doesn't have much need for technical analysis.  In fact, his strategy of buying and holding what he perceives to be solid companies with solid products and solid competitive outlooks is the antithesis of technical analysis.  Clearly, there's nothing wrong with that from an investment strategy standpoint.

There may even be nothing wrong with it from the loan officer's standpoint.  A loan officer (and their clients) must make timely decisions in cases where markets are changing even though fundamentals are not.  In this case, there's nothing wrong with a loan officer (and their clients) taking a default approach based on their current assessment of the fundamentals.

Technicians (market watchers who see some measure of value in technical analysis) choose to have infinitely more timely data fueling their decisions at the expense of that data being infinitely more open to interpretation.  

The happy medium here is to use a fundamental baseline and then to employ technicals as a sort of general framework to help warn against risk or notify of opportunity.  In other words, the happy medium is to be as pragmatic as possible, which makes sense if you're trying to heave the healthiest, happiest pipeline over time as opposed to shooting the moon here and there.

So what does that pragmatic approach suggest at the moment?

You are (or should be) well availed of the fundamentals:

• Things that imply upward pressure on rates
  • global central bank policy tightening + more expected in near future
  • Treasury issuance outlook (higher and potentially increasing.  Issuance = higher rates)
  • potential for fiscal policies and the state of the economy to add to growth and inflation--both bad for rates)
• Things that imply rates are beginning to fight back
  • all of the previous bullet points are well understood and largely priced in
  • trade war developments 
  • geopolitical risks 
  • systemic economic risks, mainly pertaining to Europe
  • a constant specter of the next recession and/or major correction in stocks

As for the technicals, We're teetering on the edge of breaking a floor that we had a hard time breaking last week (2.88+%).  Momentum overlays suggest more "room" for weakness in the short term, but roughly equal amounts of room in longer-term momentum technicals.  "Room," in this case, refers to how far away momentum technicals are from "oversold" (too much selling!  time to rally!) or "overbought" ("too much buying!  beware the sell-off!") levels.