Hoping a rapid return to fundamentals and the more correlative connection they provide between bond prices and data has today been giving a cautionary shot across the bow from the other side of the fence. What's on the other side of the fence? Trader's Paradise, of course! ("Wait a minute... Are MG and AQ really so in touch with the markets that they can make such claims? Or do they keep going back to that concept when they can't explain the disconnect between price movements and fundamental data?") Allow me to enlighten ye seekers of truth...
One of the key concepts that underly not only specific technical studies, but also market fundamentals, broader concepts of trend, and indeed common sense itself, is that VOLUME must be present in order to confirm trends or set resistance levels. Think of it like locking in "your final answer," frosting a cake, casting a deciding vote, or whatever other analogy you might come up with where component A is almost meaningless until component B comes along to catalyze the true nature of the process. OK, so some of you might be able to enjoy a cake without frosting, but c'mon people.... That's not a REAL cake! But I digress...
The point is that shifting patterns generally don't mean much unless enough of the voting members in the markets show their agreement with the new trend in the form of VOLUME. This is why we mentioned yesterday not to get too excited about the rally for two reasons, one of which was the above-par trading range, and the other being that meaningful volume was not present. This left us wide open for the possibility that the rest of the voting dollars in the market might not agree. And this in fact what we're seeing today.
To make the argument even more poignant, we don't even need to know what prices are doing to tell you where they probably would be. All one has to do is take a quick look back at some of the more massive and recent volume spikes that lie fairly close to current price levels. THOSE are the price levels that have passed the VOLUME test. THOSE are where the majority of positions are. Those are the true resistance points and gravity wells that consistently invite price curves back again and again. This is evident in the following chart. We see prices today returning to the exact range that recent volume would suggest.
MBS price movements have simply been a factor of spread trading the gyrations of the yield curve.
While the FN 4.5 failed to hold gains over 100-00 today, the 10 yr note FAILED to hold gains over the 62% retracement of March yield lows.
We'll discuss the implications on your pipeline in the CLOSE.
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