This morning I reminded that we are still operating in a trader's market. Technical price patterns and highly trafficked pivot points have a heavy influence over the directionality of stocks and bonds. These effects are expanded when data is minimal and the market is waiting around for more concrete headline news about Greece and Spain.
The chart below paints a clear picture of the extent to which the market is dominated by professional traders and dealers. The S&P has rallied back to pre-sovereign debt panic levels, but further progress has stalled as the marketplace awaits useful guidance giving information. The S&P is still up 1.45% on the day....
While TSY auction results are issue numero uno for rates traders, the stock lever is having its way as well. TSY futures prices are in yellow, stock futures prices in teal. Does that look like a mirror at all to you?
Choppy right? Yes very much so...but still contained within a range. Ignoring the panic induced move below 3.57% last Friday, this floor continues to hold firm. Overhead, 3.62% is serving as support. If stocks break 1070 it could spell trouble for rate sheet rebate.
The same applies in mortgages. Price action has been contained within a range. 101-06 is our DO NOT BREAK line. Above that level is our "positive progress status quo" range, which I will refer to as overbought (psychologically). After that 101-00 is supportive. A move lower = reprices for the worse.
BY THE WAY...don't forget today is notification day!
Besides the pending TSY auction...the marketplace still awaits tradeable news from the EU regarding the fate of Greece. I hear whispers that a coordinated EU/IMF move is on the way....wait and see. If that does occur, I am expecting to see stock traders at least attempt to ignite a speculative/bargain buying rally. See comments above regarding how that might affect mortgage rates.
Is this the calm before the storm? Was the recent rates rally nothing more than a shallow FTQ bid? Are 10s about to test 3.71 support again? Are mortgage rates about to head higher?
We have been here before...over the past 6 months when equities showed signs of weakness, I actually put good thought into making a connection between economic fundamentals and stock market sentiment. It never seemed to play out like we thought it would. I will not make that mistake again....until confirmation is obvious, I continue to assume stocks are just in a holding pattern, waiting for the opportunity to rebound higher. With that in mind...nothing has changed, I still expect mortgage rates to move higher in the week's/months to come. If you are still floating you might want to consider this...especially since we appear to have found a bottom in mortgage rates this year, regardless of positive price action in the secondary market.
NEXT EVENT: $40 billion 3 year notes. Auction results released at 1pm.