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Wednesday - February 1, 2012 10:40am ET

Current trend Direction: Testing resistance - beware of topping out

Float/Lock Bias: Locking - with prices vulnerable to more losses

Current Price of FNMA 3.5% Bond: $103.78, -9bp

Mortgage Bonds are slightly lower so far today.

The ADP Payroll Report, which provides a reading of private sector job health, came in at 170,000 for January...spot on expectations. The ADP downwardly revised their December reading from the very robust 325,000 to something a little less robust at 292,000. The ADP doesn't always match up with the official Jobs Report on a monthly basis - but longer-term after the Bureau of Labor Statistics finally revises final Jobs Report readings, the numbers correlate more closely longer-term. This 170,000 is OK, but still not nearly enough to put a meaningful dent in the unemployment rate. Tomorrow we will have more on Friday's Jobs Report, as we lay out our outlook heading into the release.

Helping Stocks and hurting Bonds a bit was China's manufacturing data coming in better than expected, which showed that at least for now, the economy is not falling into a hard landing.

Speaking of helping Stocks, the current conditions remind us of an update we wrote back in August 2010, when rumors where swirling that QE2 was coming "In Wednesday's Update, we discussed how the Fed Statement represented an important shift, giving the financial markets a tailwind. This morning, a respected hedge fund manager, David Tepper, went on to explain that this "shift" puts Stocks in an almost "no lose" position. Should the economy improve, Stocks go up. But should the economy weaken, we will likely see more Quantitative Easing (QE) - and Stocks will go up. The reason for the latter, as we have previously discussed, will have much to do with the weakening of the US Dollar. More QE alongside a weaker economy brings the Dollar index down, making our exports more attractive. This will greatly help large US multi-national corporations, which have a high influence on the major US Stock indices." Besides the prospect of QE3, the Fed just gave financial markets a "tailwind" by keeping rates low through 2014.

Besides the fundamentals for Stocks improving with the Fed continuing to underwrite the economic recovery, the technicals just made a pretty Bullish signal. The S&P 500 has formed a "Golden Cross" where its 50-Day Moving Average has crossed above the 200-Day Moving Average, which historically signals a Bull market ahead. A Golden Cross last appeared in October of 2010, which subsequently pushed the S&P up a whopping 22% over the next 8 months. The takeaway here - "Don't fight the Fed"...Stocks are set up to move higher and in doing so, Bonds could lose some of their luster.

We are maintaining our cautious position with a bias towards locking.

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