MBS Live Day Ahead: Pivotal Trading Levels in Stocks and Bonds

While recent bond market trends haven't been fun for originators, they've at least been more interesting from a market-watching standpoint.  Markets throw the laws of physics on their head, where objects at rest are decreasingly likely to stay at rest (see late July range breakout!) and objects in motion are increasingly likely to be sent in the other direction.

With that in mind, the recent selling trend in bonds has been in motion for just long enough (according to momentum technicals) that we can start to look for a shift.  To be clear, I'm not here to predict a glorious turn-around in rates.  I'm simply saying that momentum is "oversold," and that some sort of bounce becomes more and more possible as the oversold condition remains.  The bounce could be shallow or short-lived.

Things are getting interesting for stocks and the yield curve as well.  Both can be seen on the following chart.  Those of you who are big into technical analysis may see the "head and shoulders" pattern in stocks (blue line).  But even if we simply look at the pivot point (white dotted line under the blue line), there have been so many bounces in that zone (2795-ish, in terms of S&P futures) that the next move away from that zone should have additional momentum.  

The caveat is that stocks and bonds haven't been too terribly connected recently, but here too, we can consider that to be a trend that's been intact for long enough that it's due to change.  Granted, it might not change, but if it does, the resulting momentum in stocks could carry implications for bonds.  More simply put, if stocks break below that technical level and fall more abruptly, it would likely coincide with bonds bouncing back from oversold levels.