Swine Flu is a scary thing for markets apparently as the fears of a pandemic spread of the disease drove treasury prices higher in the overnight session and brought stock futures down.  But, as evidenced in our chart below, stocks (in red) opened the day about as low as they would go.  Perhaps fear of swine flu comes on strong and fades as rationalizations emerge.  Whatever the case, it took a reasonably positive 2yr treasury auction to bring stocks and bond yields back down, a phenomenon incepting around 1pm today.

Here's a chart of treasuries and stocks to illustrate the price movements:

But just as we experienced last week, MBS were more or less immune from the more convulsive movements of other markets.  In fact, they only drew strength from falling treasury yields, yet seemed to have an immunity to the periodic yield upswings and the initial stock rally.  From any given high and low today, MBS never fell more than 6 ticks.  Considering the grand total 15 tick movement on the day, this is quite stable.  The following chart of the day's action illustrates this point perfectly:

Granted, we did experience a modicum of selling after the book close at 3pm, chalk that up more to the post close hours being more illiquid and lower in volume as opposed to some tangible force driving prices lower.  Turning attention again to the treasury/stock chart, we find support for this in the late day trend continuation in treasuries.  This creates the exact sort of DIRECTIONAL trend movement we predicted after last week's "sideways" conslusion.  Will we crest previous closing highs?  The last time we were in this spot (notice the red circle with the smaller white circles showing the actual "crossing" at the 50% trendline), it marked the re-test of a key retracement line.  If "this time" is like "last time," the technical trend suggests another test of the all time highs (yellow circle).  The significance of today is that is marks the crossing of that 50% retracement.  Technically speaking, we need to be well above this tomorrow to have "confirmation" which would amount to a better than average suggestion that we'll make it back to all time highs.

So tune in tomorrow to find out if we can keep riding this wave tomorrow.  Getting above that 62% line and confirming on Wednesday would be the ultimate boon.

But I know that much more important than those "what if's" is the "what do you guys think will happen?"  As always, so much is dependent on unpredictible variables that there truly is no way to tell.  I try to be careful about my internal MBS optimism clouding my judgment of such things.  I will say this though, the possibility of regaining that high ground has been much on my mind ever since the Fed announced the 2nd leg of its buying program.  Furthermore, to see this internal horizontal trend develop exactly at the midpoint between this quarter's highs and lows has been promising.  Because if the trend repeats itself, we see an initial spike above 62%, retrace below 50%, rally again exactly to the 62% level, fall back to zero, only to return past the 62% level.  Of course we ARE NOT past the 62% level as of today, but turning attention again to the red/white circles, our indication of breaking 62% last time was when we crossed the 50% which WE DID DO today.  Exciting times....  No crystal balls, but cautious optimism is in order.

I will crash your party a bit though with some cautionary words.  At this point, our 99-23 price floor (the 0% white line) is no longer a reliable lock trigger.  In other words, we were close enough to that last week, that it made sense to float continuously until we fell through that level.  But now, we could fall almost a full point without reaching that level, leaving room for plenty of negative reprices along the way.  So you should be looking for lenders that pass on as many of the gains as possible tomorrow morning (or even this afternoon) and then exercising your personal GUT-FLOP strategy to lock the ones that make sense.  The thought is that prices have risen fairly rapidly after holding steady and/or improving for more than a week.  This usually preludes some corrective selling.  Furthermore, if we do go higher, the gains are harder and harder to achieve, not to mention the fact that lenders still have to be cautious about inundating their pipelines by offering rates that are too aggressive.  So in essence, while there are indications that MBS should improve, it still may make more sense to lock some deals in the next 24 hours as the risk of price deterioration may outweigh the hard-fought potential gains from prolonged floating.  We'll leave it at this: just be careful and make sure you're balancing risk vs. reward over the next few days.

As far as those next few days, we'll be treated with some seriously potent data to either help or hinder our cause.  Tomorrow, an even more pertinent treasury auction than today's in the form of 5yr notes.  This is more pertinent than today's 2yr auction as the duration of mortgages is much more closely approximated by a 5 yr time frame.  Then coming up wednesday, it's the 7 yr auction, also pertinent, compounded by the FOMC announcement which can always pack a punch if anything less than "vanilla" is proferred.  Like we said last week, this week could be absolutely huge.  But the fun part is sitting on the edges of our chairs together and finding out if it will be hugely disappointing, or hugely awesome.  So far we're up one game to zero in that series.  Tune in tomorrow for game two, and be sure to bring your "rally" caps.