Today saw the biggest percentage gain for stocks since October after the Treasury Department unveiled a new plan to remove toxic assets from bank's balance sheets.  Many consider this the most salient missing piece to a comprehensive recovery effort by the government.  Much remains to be seen, however, as the plan calls for joint participation by the public and private sectors in an auction process with the highest bidder ending up with the toxic assets while the FDIC will guarantee the asset up to an amount of their choosing.  In addition, the brunt of the oversight falls to the FDIC.  A lot could manifest itself in unforseen ways.  Here's a link with detailed information.

We already know that stocks rallied almost 500 points.  Both MBS and treasuries sold off to their lowest levels of the day by close, with MBS performing significantly better.  This is likely because the MBS market stands to benefit in some indirect ways from the Geithner plan.  Considering the fairly brisk selling in tsy's, MBS actually had a decent day.  here's the 2 day chart:

Keep in mind that you're looking at a very narrow trading range, and although we did reach our lows of the day at the official close at 3pm, we were better a tick by the time 5pm rolled around.  We made up a bit of ground in the spreads that were lost last week after treasuries heard they would get $300bln injection on top of an additional $750bln for MBS.  Turning to a day over day chart, one might have commented before the day even began that "it seems like we rose too far too fast and have to fall back down to earth a bit.  Indeed this was the tenor of a post last week that called attention to the historical unsustainability of massive rallies EVEN if they were precipitated by some bullish event.  So given the fact that MBS were up against a 500 point Dow Rally and an ailing tsy bid, we're pleased with the resilience.  In fact, it feels a lot like the weeks and weeks of previous somewhat sideways movement where MBS have taken over as the "stable one" compared to their flighty cousin treasuries.

From a technical standpoint, today was interesting. Here's the chart:

We did, indeed, fall through the 102-00 price level referenced last week, but only to 101-27, just in the "no man's land" of statistical significance.  If we look back at the first day of the late January through February doldrums, we see this same 101-27 price level (red line) kick off a two month period where we never rose above that price again.  With that in mind, it would certainly be comforting to stay above this price level over the next few sessions while we wait for the upward trend channel to catch up to us a bit (yellow lines).  Will this happen?  Probably not, but it is possible.  Looking at previous large, single, rally days, it would actually be more likely for us to rally tomorrow than to sell off, but as we've previously discussed, the short term odds are against us.

Medium term, there is a more encouraging technical indicator.  Not only did we fall right back into the trend channel discussed on Friday, but the top of our trading range today coincides exactly with the top of that channel.  Given the modicum of regularity in our previous downtrend and the striking regularity of our recent uptrend, it wouldn't be unreasonable to track this trend channel for a bit and hope the lower yellow line holds strong as a price floor. 

There are still many "what if's" ahead, and not all of them will be answered in short order.  Treasury's face an ongoing saga of supply concerns versus economic weakness.  Now a Fed bid has been thrown into that mix but was countered over the weekend to some extent and then again with today's announcement.  So the final resting place (no pun intended) for tsy's is and probably will be an ongoing uncertainty.  Then there's the prepay picture which may take months before becoming sharp enough to make definitive bets on.  So with the exception of an "up day" that we might snag in the next few sessions, all things being equal, we'd probably leak out a few more of our recent gains.  Even if we can manage to rally a bit in MBS, it's no guarantee that lenders have sufficiently been ramping up personnel to escape the plight of raising rates to stem excessive demand.  Caution is the order of the day as many wish they'd excercised more last time we flirted with these rates.  The past is certainly not a guarantee of the future, but given the uncertainty, better safe than sorry, at least for today.