There's so much to talk about in terms of trends, locking, floating, and general application of the information here that at best, we'll gloss over most data today and focus on where the rubber meets the road for the moment.
Trend
With respect to this post's title, it means that a firmly established trend is most useful NOT to predict its continuance, but rather to identify a turning point, whether it be for the short or long term. Applying this to the actual recent trading, we can certainly see a clear trend of higher lows in MBS over the last two days. Although we'll factor out a few of the peakier highs and lows, a clear trend has emerged recently. Here's a shorter term view showing some of yesterday and all of today's action so far.
Adding more credence to the trend is accomplished by zooming out a bit more. Remember, relying on trends to predict CONTINUANCE is a fool's errand. They tell us so much more about momentum shifts when they are convincingly broken. In other words, these charts don't mean it's going to continue to be "up up and away!" for MBS, but rather that it HAS BEEN, and whenever that ceases to be the case, it's significant. These are among the most basic concepts of "trend" as used by technical analysts, but one of the most often misunderstood. Take a look:
Relating Recent Trend To General Lock/Float Considerations
That's quite a well-behaved 6 day trend channel... I dotted the top line as liberties could be taken with the spikes there as well in order to narrow the range, but as we head in the direction of historic highs, and since breaking topside trend would simply suggest floating anyway, the solid line is of much more concern. We've already discussed giving certain times of the day a wide berth. But if we see prices "hanging out" far enough below trend, for long enough, it's a super awesome lock indication. I'd apply that logic to the 2 day chart in the case of short term deals and to the 5 day chart for medium term stuff. Longer term deals are better served with horizontal price levels. For that, let's just say that crossing "the desert" (to the downside) would be cause for long term lock panic (far enough, and for long enough also apply here). Unfortunately for long term deals, there are usually a fair amount of losses to take before tripping those triggers IF prices had rallied aggressively in the recent past (which they are). In other words, we could fall flat on our face in this rally. History taught us that last summer (and before of course). The trade-off for those with longer timeframes is that things can LOOK like they're falling yet still push higher. And if we're talking about longer term deals and that happens, in many cases it leads to broken locks, or unhappily accepted rates, or even losing the deal.
So you can either play those conservatively and be predisposed to lock, be aggressive and float more, or try to find a balance by educating yourself as much as possible, applying GUT-FLOP type methodologies, and rather than being one or the other, walk a middle path. That's my personal preference, but whatever trips your trigger (your lock trigger that is).
Gameplan For The Rest Of The Day / Immediate Lock/Float Considerations
As of THIS moment, locking looks like the last thing on most agendas as the trend is our friend and has not made any threats on the "higher low" line on either of the above charts. But that all could change in the NEXT moment. There's nothing earth-shattering set to hit the tape. Volume is reported high electronically, but traders say it feels low. So at least for THIS moment, smoothe sailing. BUT,
A POTENTIAL UBER ALERT WARNING:
Granted, the times are unprecedented and the past is no guarantee of the future. But we simply do not see rallies this aggressive persist without at least somewhat of a correction. We don't see 5 day gainers that often (5 days of MBS gains, not the olympic dive). We don't see uninterupted gains this intense continue to be uninterupted for long. Considering what caused the sell off, however, it's not out of the question to just sort of "level off," but there's an equal chance of a correction that causes price losses large enough to warrant extra vigilance on one condition. The one condition that drives the cause for heigtened alert would be the extent to which you feel the "love" from lenders. If we have this almost 3 point rally in less than 2 weeks as we've had, but your YSP has only improved by 1.625, things aren't as urgent. What you really need to watch for is a high correlation between recent gains in MBS and improvements in rate sheets. If someone is "passin' it on," It would be hard to talk me out of locking at the first sign of the correction. The only challenging question there is "do I lock today or float to tomorrow?" Not only can't I ever tell you with 100% certainty, I can't even give you my best probability until we see how the day ends up and you have a chance to compare that to how much lenders coughed up. So we'll put a cap to this slightly more detailed discussion on locking by the end of the day.
Glossing over the news:
- CPI headline and core both up .1% either lower than or on low side of most estimates. Fixed income liked it. Economists and analysts now poking their heads out saying, "yeah, we kinda wanted to tell you inflation wasn't a real concern, but you wouldn't listen to us."
- Trade balance narrowed appreciably from around $150 bln to around $100 bln.
- more on news, data, and fundamentals by the end of the day.
MBS Market Alerts
