We have been harping for weeks on the incongruity between a Fed that needs to keep down long term interest rates and a risking stock market that is inflationary and points to higher long term interest rates.  Today, with the S&P 500 within a hair of breaking June highs, Bernanke came out guns blazing with an oped in today’s WSJ (as detailed in our morning report) and testified before congress to talk down yields.  So far, the 30 year has had its greatest one day gain (with yields inversely heading down by the same margin) since the July 8 09 interim low in the S&P 500.  Make no mistake, Bernanke does not want new highs in yields and is willing to throw the stock market under the bus.  No doubt new equity longs will vigorously defend their positions and we can easily see new highs.  However, the battle is raging and we are not willing to jump onto the buy and hold bus until there is a clear victor.  Hopefully, this will emerge over the coming weeks.

However, as we have posited before, we could enter a situation where long term Treasuries and equities are manipulated in a tug of war in a vain attempt to maintain the status quo–two weeks equities are on a massive tear and bonds are down, the next two weeks reverse, etc.  The longer that goes on, the greater damage is ultimately done to the economy as investors are shaken out permanently from the markets.  As ZeroHedge would say, we would then have two SPARCs trading with themselves in a basement of the NYSE financed by FRNY funny money.  Another point on this last sentence–just because the New York FR Bank is pumping out dollars through permanent market operations (POMO) twice a week does not mean this is Bernanke’s doing.  New York is Wall Street and Bernanke is Washington.

The Precise Take – Quiet Monday closes over June resistance; continued strength overnight

Bernanke speaks at 10:00 am, which could be the mover of the day, should there be one.  Earnings announcements continue to be dribbled, but with no other scheduled news, we have bumped him up to the Major Market Movers in the right column, perhaps out of nostalgia for the days last fall when his mere appearance on television could send the markets standards of deviations higher or lower.  We don’t expect this action today, but will be cautious around 10:00 am, when his testimony to the House Financial Services Committee is released, especially in light of his coordinated op-ed in the Wall Street Journal this morning, which is his standard toolbox speech, but geared toward the Fed’s exit strategy for draining reserves and ultimately fighting inflation when the economy recovers.  Bernanke seems to have given up on the idea floated through San Francisco FR Bank President Janet Yellen whereby the Fed would issue its own debt to drain reserves—such are the political headwinds now at the Fed.  As we updated yesterday, the 30 year and 10 year hit key support levels and were able to bounce, keeping yields in check even as equities edged higher.  However, a material breach will set yields off to test highs, putting the Fed in a precarious position.  Clearly, the Fed and the administration want to have their cake and eat it too—higher equities and lower long term interest rates.  We will watch for clues as to any change in how these two plates will be kept spinning.

The ES closed at its highest level of the year yesterday, finally overcoming the 944.75 June closing high, reaching the 952.75 long term upside target (the next being 970.50), and thus paving the way for higher prices.  That being said, we are in the critical resistance zone and need to be very careful with both longs and shorts as there tend to be shakeouts on both sides in these areas.

Daily R1’s (calculated on day-session-only and the day and overnight sessions combined) from 953.00 to 954.25 have provided overnight resistance as we write.  We are bullish down to…

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