August is the slowest month of the year in financial markets. Many participants have surrendered their Blackberry(s) and will be detached from reality, off and on, until school goes back in session at the end of the summer. Heck, even those who've just returned from their "detachment" will be somewhat "zoned out" as they play catch up. Don't forget this when you see choppy price behavior  in the day's ahead. Major decision makers are stepping "OUT OF OFFICE" and markets will be left to run wild in whatever direction is least resistant.

Plain and Simple: Do not try and tie the day to day directionality of financial markets to general macroeconomic sentiment.  It's a trader's world...

That seems to be the case today as headlines cite better than expected econ data and strong bank earnings as the reason behind a rally that has sent the S&P to a 2-month high (if they closed now). I caution though, trading volumes are low across the board and open interest is leaking out of stocks again. This behavior reflects short term position squaring and profit taking. This price action is indicative of: SHORT COVERING

I initially targeted 1,130 on the S&P as my "forced buying" ceiling,  after that I think it's gonna take a rebuilding of long positions before S&Ps rally on.  The COT report says accumulation started to take place last week, but week over week changes weren't indicative of any specific strategy.  Speculators are a little less short and a little longer while the street is a little less long and tiny bit shorter. In the event flows "run wild" to the upside, 1,140 is a key level of resistance for the S&P.  If today's short covering rally doesn't attract much new money and the bid for risk is lost tomorrow, the 200 day moving average provides support at 1114/50% retreace at 1115. Then it's the psychological pivot at 1,100. After that firm support is first found at 1190, then the 21 day moving average at 1182.

If we move far in either direction, we'll be reevaluating the placement of positions and whether or not the wider range is due to be retested. The S&P 500 is currently +2.19% at 1125.72.

The bond market isn't having a great day but things aren't terrible. Volume is low, 10s are still trading under 3.00%, and "rate sheet influential" MBS coupons have "stopped the bleeding" following a seldom seen poor performance last Friday, which I described as "exhaustion".  The 2s/10s curve is 4bps steeper, but that's been a consistent theme lately. If the 2/10s curve steepens over 244bps, it's likely a result of a supply concession (3s/10s/30s next week), until then this chopatility is nothing out of the ordinary.

The chart below has acted as our BIG PICTURE directional guidance giver. As you can see, the red trend channel continues to consolidate and yields still look like they have room to move lower. In the event 2.90% resistance is broken, 2.85% is the first target on my list. After that, if the deflation story really grabs pulls yields lower, the "PANIC ZONE" is between 2.72% and 2.54%. On the upside, 3.00% is a psychological layer of support, then 3.05%, 3.11%. After that, follow the dotted lines up to 3.20 and long-term support at 3.27 and 3.31%.

Now for mortgages...

Record MBS prices = record low mortgage rates. Until 3.50s start trading forward in size,  the lowest rates par rate we'll see is 4.25% (scattered reports of investors going lower, nothing widespread). If 10s do rally, expect mortgages to lag. If 10s sell through support and duration starts being shed, production MBS coupons will likely experience a few sessions of "lower prices and wider yield spreads" (excessive weakness) before bottom pickers swoop in to do some bargain buying.I don't see a lot of price weakness in MBS unless TSYs really start to lose their "flight to safety" bid.

The September delivery FNCL 4.0 is -0-07 at 101-24. The FNCL 4.5 is +0-06 at 103-31. The secondary market current coupon is 2.7bps higher at 3.71%. CC yield spreads are tighter on the session.

On Friday, I offered consumers the best advice I could possibly think of ikn this environment.

Here is an excerpt:

The "best executed" lock/float strategy comes down to  finding an originator who knows the loan market, studies underwriting guidelines, and just plain old gets the J.O.B done. You have to let the loan officer earn their commission. That's how you "ride the float boat" in this environment...make sure you have a damn good skipper. Plain and Simple.

If you're a loan officer, I think the best advice I can offer is: Lock after you've gotten the file far enough to foresee an underwriting decision and the closing date is visible.  45 day floats are still worth the risk,  you can really afford to float down to 25 days, but that's where I would start looking for an "out". If loan pricing is really rallying, ride it out to a 15 day lock but be very  conscious of pipeline constraints. If your lender requests a slow down in refinances or increases turn times, that's a hint secondary is adding margin to your pricing, not what you want. 

While it hasn't mattered too much of late, if the benchmark interest rate environment does start to shift toward a trend of higher rates, we will ALERT. In that regard I think Treasury auctions will present the biggest challenge for mortgage rates in terms of influences from related markets. If you're floating right now, the Treasury will auction 3s/10s/30s next week.

Beyond that, watch for periods of really aggressive pricing and cheaper buydowns. I will be keeping an out of for an increase in 3.50% coupon sales.....