After Wednesday's euphoria, yesterday was a bit of a let-down.  And although today continued that selling trend, it was not that much of a surprise from a historical standpoint.  We'll get to that in a second, but let's wrap up today briefly.  Here's the final chart:

What happens when rates improve?  First of all, demand for new locks at lenders will pick up.  This generates new MBS SUPPLY since the loans that those lenders are now planning on originating will eventually become new MBS to be bought by investors.  Excess supply lowers prices, but considering the net effect of government participation this year is already committed to 1.6 trillion dollars of demand versus an estimated 1.8 trillion dollars of supply, the demand picture is extremely favorable.  Still, we can't simply have 365 up days.  Today was one of them as all the new locks created more than a dollop of supply for the MBS markets to digest today--over 3 billion which is an uncommonly high day against the backdrop of recent memory.  To lose only 7 ticks on the 4.5 coupon vs. a 10 tick drop on the 10 year tsy and an even day on the 5yr tsy is a surprisingly calm result for such a supply glut.  Additionally, higher coupons got a little more love than the lowers today, not only because they rebounded from a rally-precipitated spread blow up, but also because those fears created by the "down in coupon" movements that should be created by the new $750 check from uncle Ben are not expected to increase prepayment speeds appreciably for a few months.  So basically, the markets assume--probably correctly--that higher coupons will begin to pay off faster as new money comes into the demand side of MBS, thus incentivizing holders of higher coupons to refi.  The result is that higher coupons underperform vs. lower coupons.  Simply put, that relationship was corrected somewhat today AND traders have some time before becoming meaningfully concerned with the prepayment speed adjustments.

That takes care of today.  But what's on the horizon?  As always seems to be the case, there are multiple ways to look at it.  It's never a game of predicting what will happen, but rather discussing the potentialities and adjusting your individual pipeline plans to maximize profit and sanity while minimizing risk.  Although we're in unprecedented times, technical indicators from the recent past offer some guidance.

Yes, the following chart has more colors than a Benneton Ad, but let's break it down:

WHAT'S SCARY?

First of all, let's take a look at points one and two which occured in mid december when "further details" of the buying plan were announced and Jan 6th when the buying started, represented by the numbers 1 and 2 respectively.

The reason we call attention to these dates is that they were the last two "euphoria" days for MBS prices, wherewe rallied  over a point.  They are also "contained" by the RANGE we've experienced since decembers rally, with the 6th being the high point and March 2nd being the low.  This last point is only brought up in order to argue statistical significance.  In other words, we could look at previous huge rally's but they wouldn't be as statistically significant because they occurring at much different parts of the price spectrum, wheras these two, in addition to wednesdays are all within the trading range of the past 3.5 months.  It's plain to see what happened after these last two rallies: 2 weeks to 2 months of agony.  If we sprinkle in new fundamental market data such as the lender ramp-up in personnel, the higher dollar amount of fed commitment, and the fact that the commitment has arrived this soon in the first place, we can accept that it probably won't be as bad as February, but from a technical standpoint, yesterday and today's give-backs seem appropriate.  Furthermore, they suggest the possibility of some temporary continuance of languishing. 

WHAT'S NOT

102-00 is an important price level here.  First of all, we NEVER got above that until the actual day of 1/6.  In other words, it was overhead resistance even for the mighty december rally.  As always, overhead resistance, once violated becomes a floor of support, and it was to some extent for the 7 sessions following the 6th.  Furthermore, the period leading up to January 6th was a general uptrend whereas we were in a general downtrend through February.  At that time, we began a general uptrend signified by the "higher lows" on the white line and the "higher highs" on the yellow line.  After being capped by the strong ceiling of 101-08 (teal line) several times, yesterday's announcment broke us through that.  The next test would be the yellow line to see if we stayed in a stable trading range.  Broke through that like it wasn't even there.  Next test would be the psychological and technical 102-00 ceiling which we'd never closed above but for 8 days ever.  Crushed that as well and came within 3 ticks of all time highs.  So does the retracement make sense?  Yeah it does. 

And retrace we did, yesterday and today.  But it's very interesting to note where we ended today: right at the confluence of the 102-00 line and the high end of our current trend channel.  With the 101-08 "previous ceiling" below, as well as the low trendline at the very bottom, we have FOUR indicators of momentum change to aid us in our analysis over the next few days and weeks, because (repeat after me class) an overhead trendline, once violated, becomes support.  So underfoot we have four violated lines.  If we rally monday, 102-00 becomes a potentially statistically viable floor, even if as briefly as Jan 6th time frame.  If we stay above the yellow line, that would be quite bullish.  From a historical standpoint, technically the 101-08 teal line is the highest probability retracement.  And the white line will be an indicator of whether or not our current uptrend is holding.  Even if we fall back into our previous trend channel, we'd still be in great shape, and still be OVER that teal line.  Going under the teal line we'd also go under the white line, both indicators of a potential momentum shift.

Long story short?  Several times in the past, when we've had rallies like wednesday, they've been fleeting.  Short term deals may want to take heed from these past lessons.  But if you feel good about treasuries holding decent levels, and about the current trend channel, we may just have to "fall back to earth" a bit before continuing to advance.  The standard "µ" shaped retracement suggests we might have a few gains early next week, only to fall back into the trend channel.  So there may be some saving grace for floaters.  But--and I know you're sad to hear it--there's no way to tell for sure in this market.  GUT-FLOP.  Take your gains when you can, cut your losses when it makes sense.  Net-Net, you should be coming out ahead.  Whatever the case, stay closely tuned money as the actualities of these potentialities play out in real time and where we, as always, will be bringing you all the pertinent action as it happens.