Today has been unique. In recent weeks, rallies have taken us outside well-established trading ranges, but always with mitigating caveats or forthcoming important data that have called the continuation into question. This has even been the case during the most recent bullish price movement beginning on the 20th of September. Either resistance was not broken significantly enough or a data event, such as FOMC announcement, was coming up quickly enough for us to place expectations of continued improvements or merely for the holding of the new range on hold until more information became available.
All signs pointed toward NFP as that critical event this week. But today--a day before that critical event--we find ourselves with sufficient evidence consider current price levels as something more than a fleeting anomoly. And although NFP retains its previously assigned power to move markets, and although we don't have enough of a suggestion that the rally will continue, we can at least reiterate the thesis of today's previous commentary. We finally have at least SOME confirmation of recent bullishness and at the very least: today's rally means SOMETHING.
Only one meaningful bout of retracement? This is NOT normal against the backdrop of recent weeks. Considering that prices are at by far their highest recent levels and this rally has been on of the longest continuing uptrends, the standard course of action this afternoon would have been for a massive correction, or at least several smaller but very choppy opposing price movements before finally arriving at a less-than-exciting price level. But here we are a mere 4 ticks off the day's highs, and only mildly shaken by the brief (1 hour) and shallow (8 tick) retracement that occurred between 1:30 and 2:30. Other than that, the range of upward price movement today is strikingly narrow and strikingly linear.
Everywhere we look for those mitigating factors that would normally sober rally sentiment, we found another pleasant surprise... Spreads to treasuries were fairly even on the day as the yield curve underwent it's own version of the rally. Curve metrics themselves weren't breaking any recent records, though 2's10's got back to a fairly low 231bps. Still, nothing we haven't seen already this week. What about looking to some sort of indecision suggested by contrary stock movemen? Nope... No red flags there either as the stock lever was clearly in lock-step most of the day.Looking to volume for reason to doubt the rally's significance also proves a fruitless endeavor as tsy futures posted their best volume of the month.
The underlying message is this: today's rally offers far fewer legitimate reasons to doubt its significance than recent rallies. Of course we can always find something that helps the case for doubt, but examples of that are in shorter than normal supply today. If nothing else, this is significant in the sense that it shows a huge volume of trade can come out in support of continually more aggressive price levels, even as we push into multi-month highs. The dark horse? Probably the risk that "snowball buying" could have been a factor, but even if it was, it's still subject to NFP's power which could either accelerate the trend, reverse it, or simply help us consolidate some of these gains. Ha! 2 out of 3 scenarios in our favor finally! Now if only it was a 2 out of 3 chance...
So what do you do? I'd certainly have protected my pipe going into tomorrow. Any deals that had been with me more a while, I'd be heavily lock biased. MBS are less than a point away from all time highs! If I'd asked most of you, "how much would you lock if MBS got within half a point of all time highs?" back in the summer, what would your answer have been? That said, simply looking at the "today vs. tomorrow" decision, today's events probably have me a bit more willing to pay the price of admission to tomorrow morning's extremely interesting show. And if you really want to play this game (different than "playing games"), then you find a way to protect yourself on BOTH sides of risk. So just like we can get burned on huge, unexpected price losses, we can almost as easily get burned on huge unexpected price gains (i.e. you locked too much). At least the nature of lender capitulation to MBS market works in your favor on that one, that is to say, they take it away faster than they price it in. And with lessons learned and damage done in Dec/Jan/Feb, future MBS spikes could be subject to similar primary/secondary spread widening.
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