Leading Economic Indicators were also released, up .3%.  This index has posted positive gains for the last three months yet the six month index is down .8%.  Doing better but a long way to go.  Last on the data plate was the Philly Fed Index which rose from minus .7 to plus 1.0.  Slow growth in manufacturing did the trick.

Stocks have been all over the board but holding a positive bias so far today.  The big board is up 102 points, primarily on the heels of solid earnings from Caterpillar and Mickey D’s.  Companies with global exposure are the place to be.  Bonds, notes, and mortgage backs are seeing some profit taking today.  Currently, the 10 year note is off 10/32’s while current coupon mortgage backs are off 7/32’s.  Mortgage backs have been trading like a roller coaster, down 10/32’s and then a minute later, down 4/32’s.

Weakness today has formed bearish divergences on the 60 minute chart.  ADX has turned bearish as well.  These signals hint that a new leg down is forming on the triangle pattern we follow.  Odds are starting to increase that the next move could send the 10 year note down another ½ point.  Austin mortgage borrowers are advised to be defensive. Stocks will be the key.  If they slip, we’ll do better.  Overall, QE2 will keep a floor under the market.  Just the same, we’ll need to deal with the volatility.

Stocks have been in the driver’s seat today, slipping by over 100 points as Big Blue (IBM) and Apple disappointed the market with weak results. China, raising its lending rate by .25%, helped the dollar but put additional pressure on stocks. You would think that note and mortgage back pricing would have gotten a boost from all this equity punishment. Not to be. Currently, the 10 year note is off 8/32’s. Good news is that mortgage backed securities have tightened to treasuries.

Overall, trading today has been a range-bound affair with prices above yesterday’s lows and below yesterday’s highs. Traders call this an “inside day” which is simply a neutral pattern. Expecting mortgage pricing to hold steady is a pretty good bet.

Retail Sales and strong manufacturing results out of the Empire State didn’t help either.  Mortgage backs performed better than treasuries as spreads tightened.  Technically, it is time to pay attention.  Weak day structure on the 10 year note chart is reinforced by a second consecutive day close below the 8 day moving average.  That’s the bad news.  Good news is that intraday studies are very oversold and the market has good support close by.  So to speak, we are at that line in the sand.

Next week will be the true test, one that we would expect will see the market trade sideways to a little better (slightly improving mortgage pricing). Overall, we think this is the low probability trade as QE2, even though it is fully priced in, is a force to be reckoned with.  When the Government is the buyer of choice, most follow the ant age, “Don’t fight the Fed.”

Call it neutral/bearish and not a market to throw caution to the wind.  Next week’s data is light with Housing numbers, Leading Economic Indicators, Philly Fed Survey, and the Fed’s Beige Book.  Have a great weekend.

Text book trading here as this baby is tracking the down trend line like a hunting dog.  Good news is that we are at good support mentioned this morning.  Play defense, Austin mortgage borrowers, as the light at the end of the tunnel  is not the other side.

Weekly Unemployment Claims were also on the docket, rising 13K to 462K.  Just when we though the employment picture looked to be improving, reality is telling us that a sideways move with little improvement is probably the correct call.  Continuing Claims were the bright spot, falling 112K to the lowest level since November 2008.  Yesterday’s price action was somewhat of a surprise as late in the day, notes, bonds, and mortgage backs made a comeback.  Not sure why, given an as expected 10 year note auction and positive stock market.

Seems as though the reason has to do with QE2, the 600 pound quantitative easing gorilla that is still in the picture.  Tells us two things; one is that the market will (should) be supported on pullbacks until details are released.  Two, the market is trading only on this, so to speak its a one trick pony.  Austin mortgage borrowers need to be careful.

Currently, the 10 year note is off 5/32’s, mortgage backs are down 3/32’s, and stocks are off 20 something on the Dow.  Yesterday, I talked about the Elliott Wave chart and the high probability of a new A wave beginning.  Notice how the uptrend has been broken yet needs confirmation.  Now look at the bearish cross on the RSI oscillator.  These are good early signals of a market that is in transition, moving from bullish to neutral/consolidative or possible bearish given a shift in economic fundamentals.  Similar patterns are showing up on the candlestick chart.

Austin mortgage borrowers: best to take a conservative approach given the amount of volatility we expect.

The fear factor today will be the results of 21 billion in 10 year notes crossing the auction block (high noon cst).  After yesterday’s dismal 3 year offering, the street is wondering who will show up to buy the paper.  Notes, bonds, and mortgage backs are respecting the fear of the unknown.  Currently, 10 year notes are off 15/32’s, the 30 year bond is off 40/32’s, and mortgage backs are cheating fate, down only 3/32’s.  Stocks are having a party, up 110 on the big board as corporate America churns and earns.

Technically, there are a couple of things you need to pay attention to.  First is the Elliott Wave count which has probably completed its 5 wave.  This pattern started in June and has been very accurate.  The break of yesterday’s trend line and continuance to trade below it is strong evidence that a new A wave has begun.  If correct, the pattern projects a trade to at least the 38% retracement target of 125 28 (10 year futures) or the yield equivalent of 2.58%.  This type of corrective trade could last for a month, slowly eroding Austin mortgage pricing until a bottom is found.

From our perspective, the market seems to have fully priced in QE2 and now must wait until the next FOMC meeting (11/2) to see if it comes to fruition.  The “wait” is making some nervous.  Continued corporate earnings, with the expectations that most will beat, will add additional pressure to fixed income and Austin mortgage pricing.  Best bet for Austin mortgage borrowers is to take a defensive posture.  With so much bond-friendly news priced in, the risk reward for better mortgage pricing is just not there, folks.

Auction supply, to the tune of 100 billion kicks off today with 36 billion of 2 year notes.  Tuesday/Wednesday’s plate will be filled with 64 billion of 5 and 7 year notes.  Late last week I talked about the upcoming economic calendar which heats up tomorrow, Thursday, and Friday.  Market players will pay close attention to the manufacturing and industrial data, looking to confirm or reject the recent uptick in activity.

Overall, we see the stock market as moving away from any notion of a double dip, instead feeling a little giddy about taking on more risk.  Reason being is that traders view one of two scenarios playing out, both good for stock prices.  The first is that a bonified recovery is taking place, albeit at a slow pace but recovery none the less.  Conclusion, stocks go up.  Second scenario is that the recovery falters and Sir Ben fires up the helicopter, spreading money all over the country as Quantitative Easing 2 goes full bore.  Asset purchases by the Fed (Treasuries and MBS) will drive the stock market higher.  Scenario number 2 will keep Austin mortgage pricing low while what’s behind door number 1 will lead to a gradual escalation in mortgage pricing.

Short term focus for Austin mortgage borrowers is tactically defensive, only due to auction supply paper.  We see traders trying to back the market up (selling), only to buy once again at the conclusion of the auctions for month end/quarter end.  Good case can be made for a volatile week ending up right where we started.

Meanwhile, New Home Sales were unchanged in August, hovering at the lowest level since December 2003.  Stocks took the ex-transportation number (Plus 2.0%), coupled it with a statement by hedge fund manager Tepper that he is a “buyer” (stocks), and rallied out of the gate.  Bonds, notes, and mortgage backs ran for cover, falling 1 point in the 30 year bond.

Currently, the 10 year note is off 12/32’s with mortgage backs following suit, now down 8/32’s.  Overall, volume is light with money coming out of fixed income and being redeployed into stocks.  Mr. Tepper is said to be one of the top hedge fund managers on the street.  His returns, along with a number of hedge firms have been anemic this year (1.0% to 1.50%).  This is not a good way to keep your clients.  Not saying that he’s in buying stocks and trying to talk the market up but……….

Hard to see anything substantial in gains on the Dow/Naz until we put people back to work.  By the same token, it’s hard to see Austin mortgage interest rates move much higher given the many head winds the economy is faced with.

The next step for the market is to consolidate and find “value”, a level where buyers and sellers are neutral.  Given the longer term neutral/bullish bias, the most we should see the market sell off to is 125 03 in 10 year futures.  Austin mortgage borrowers are encouraged to take advantage of any rallies.  Too many cross currents leads to high levels of volatility.  Play it safe and take advantage of your opportunities!