Today's unwelcome (but not entirely mystifying) selling has subsided for a moment as several markets ping some top tier technical price levels...
Most of you will remember the "stock lever" that was such an integral part of analysis before the current wackiness. Now with the reconnection of economic data, stocks, and the yield curve, we've turned increasingly to the S&P as a cog in the MBS machine, thus effectively dusting off the 'ol stock lever and seeing what it can tell us about current market conditions.
After the lever gave fixed income a decent glove slap just after the noon hour, a boa constrictor-like squeeze has ensued that finds MBS fighting for it's life at the 99-07 price level. But at least the damage has abated and will hopefully stay sideways until FOMC minutes. At first blush, the S&P appears to be bumping up against the peak of the "right shoulder line" at 927.23, thus giving the old boa second thoughts about having a go at a lunch this big. Take a look:
Within the scope of recent months, the head and shoulders formation that emerged in the index was a big enough deal to make it onto broadcast news--not something we normally see for technical analysis (nor was the Tri-Star doji in daily candlesticks). It's not the end of the world or a guarantee of MBS improvement if we break it or hold it respectively, but against this year's backdrop at least, it squeeks onto the list of price levels one might consider epic. But as the S&P gets tripped up there, what's the significance of the analogous MBS hesitation at 99-07. Turns out to be quite a lot really...
Where does that leave us? A couple places...
- waiting for FOMC minutes...
- watching these price levels like a hawk at the end of the day (remember, these are DAILY closing price levels, not intraday)
- watching these price levels intraday for rapid directionality following a bounce or a break.
- potentially weathering a sideways storm as we wait for the rest of the week's data including the A-list bank earnings
In short, the minutes may give the markets a push in one direction or another that is amplified in severity by these technical levels. Bank earnings et. al. will then either confirm that direction or reverse it. Urges to lock at the moment might soon be precipitated--certainly for short term deals--if FOMC minutes are unfriendly. But unless they create a substantial incremental problem for MBS, longer term lock decisions should be informed by the fact that the week's remaining data could make the opposite suggestion, and of course because we're at "the most significant low in 4.5 MBS since Fed buying was announced." To move MBS much below these levels would be a vote to head back down into the MBS Underworld, and no one wants that do they?
2s vs. 5s: 146bps
2s vs. 10s: 256bps
5s vs. 10s: 110bps
NYMEX Crude is trading over $60 at $61.74
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