12:04 pm EDT:  Below is the table from this morning’s report updated to include the funding announcement of the US Treasury released today at 11:00 am.  We don’t recall the 52 wk auction scheduled to be announced this morning and it appears to have been slipped in at the last minute.  The bottom line is a record $199 B will be auctioned next week, a $34 B increase over the corresponding week in the previous month (even without the 52 wk auction, the increase is $7 B).  Including the 10 Yr and 30 Yr, which were already auctioned this month, there is $229 B in new debt being issued this month. 

Not surprisingly, long term yields are soaring and bonds are sinking to the lows established before Bernanke’s congressional testimony on Tuesday.  With a soaring stock market (inflationary), record debt issuance, and a Fed that refuses to monetize debt (evidenced by shrinking M2–updated weekly report today at 4:30 pm), we are on a collision course with a very volatile end of summer into fall.  We pay respect to the breakout today and would not discourage experienced traders that can monitor positions on a daily basis and enact good risk management, but the threat to long term passive investors is immense. 

Eventually Bernanke will either further shrink money supply to keep yields under control (with the good possibility of inducing another market crash), or yields will be allowed to explode and we will enter the beginning of a hyperinflationary cycle that will take some time (perhaps a year or more) to become dangerous, but ultimately ends with a bond market singularity that results in the reptriation of all US debt and practical end to the US Dollar.  Bernanke is aware the latter is much more onerous that the former, which is why we are skeptical of suggesting any long term investment in equities by any but experienced traders.

In the ES, we hit our 970.50 major upside target and are closely approaching the daily R3′s at 974.75 to 976.50.  Given the strength so far, we would not be surprised to see them eventually exceeded and could even hit monthly R2 at 986.25 on the permanent open market opearations (POMO) close ($3 B in funny money [before leverage] dumped into the markets this morning).  Also, the Treasury just announced that tomorrow it will make Agency POMO purchases, suggesting another strong close tomorrow.  Accordingly, even if the market is extremely overextended on the close today (likely) and a short is initiated, it should be closed in the first hour tomorrow rather than held to close.

10:11 am EDT:  Last resistance is 962.50 to 963.50; however, we would be surprised if it is not easily cleared.  Only longs until price is below 951.25 (unlikely).  Still watch for 11:00 am Treasury funding report, but should not be a major market mover.

The Precise Take – Today could decide the fate of the rally

Today is a very important day for the US Treasury, for at 11:00 am EDT, it will release its funding intentions for the 3 Month, 6 Month, 2 Year, 5 Year and 7 Year auctions.  In the below table, we can see the Treasury has steadily increased its borrowing through the 5 and 7 year Notes.  Each funding announcement has been met with an increase in yields over the following weeks, except for the last one on June 19 09.  With the S&P 500 within points of breaking out (which would likely send yields higher on its own), the market’s reaction today will be critical.  If the funding amount is less than the $165 B, yields could be temporarily spared from further upside action in equities as the markets (always taking into consideration the second derivative only!) become less worried about the glut of US debt.  However, if the increase continues today, Bernanke will have a large problem on his hands should equities continue to rise.

Funding Intentions of US Treasury in $ Billions

We’re running short of time, so we point readers to today’s time profiles for expected market direction on page 2 and where we are bullish or bearish on page 3.  Watch the 10:00 am existing home sales report.  If we’re at resistance and there is a spike high reversal through resistance, this is bearish.  If we’re down at that point and the market reacts positively, the momentum could carry through resistance.

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