2:05 pm EDT:  The ES bounced off the upper range of target support of 935 to 937 (low 937.25) and is consolidating the range.  Watch the next hour for a breakout one way or the other.  Most likely, it will be down and inconsequential, but a move up could garner momentum.

Click below for larger image on anchored VWAP bands. We’ve gone from S2 below VWAP to S2 above in a very short time.

Overall, it was a mixed report.  The headline figure for leading indicators rose by 0.7 to 100.9 for June 09, with May unrevised–both positive.  The coincident and lagging indicators continued their trend down, with previous months’ data revised for the worse–a bit negative.  The most important piece of information, the ratio of coincident to lagging indicators, did rise, with May’s previous slight decline from April being revised upwards so that we now have three consecutive months of an increase in the ratio–positive.  As we wrote on May 21 09:

The conference board released its leading, coincident and lagging indicators today at 10:00 am for the month of April.  We and many others follow the ratio of coincident to lagging indicators because an uptick has successfully predicted the month NBER officially marks the end of recessions within +2 months since the data was first published in the 1960’s.  We got that uptick today and note that the direction of the revisions for previous months was higher.  Accordingly, we would not be surprised to see May 2009 marked as the official end of the recession that began December 2007 and would expect July to be the latest month so marked.

So why are we hesitant that NBER will eventually mark May, June or July 09 as the end of the recession?  1) Ideally, the ratio would uptick more dramatically and be on improving coincident indicators, instead of not falling as quickly as the denominator, the lagging indicators.  2) The current situation is unlike anything since the start of the data going back to the 1960′s.  Accordingly, we can take this as positive for the economy, but with a grain of salt.  Also, as we saw with the 2001 recession, the markets can experience new lows long after a recession is over.

10:10 am EDT:  The 10 year hit is 50% retracement from June lows and the 30 year its 61.8% earlier this morning.  A break signals a likely retest of lows and much higher yields.  If the Fed is to defend long term interest rates from rising, it will need to do so over the coming few days.  Any intervention by the Fed would require a return to lower prices in equities and would at the least put a damper on the prospect of material new highs.

In the ES, 944.75 (old June closing highs) was the level to watch and has been breached only immaterially (945.50 high), with the 10:00 am Leading Indicators report retesting the level and now failing.  We will now likely retest at least the 935 to 937 value area and would not be surprised to see the high of the day in.

Update 10:14 am:  Would add to the above, that if we do break to new highs, we’re not top pickers as there will likely be too much momentum.

The Precise Take – Overnight strength into old resistance

The ES overnight has easily accepted value at higher and higher levels, which is a reversal from the probes last week into the 940 area that were rejected swiftly.  The general consensus is that equities are overbought and at least a small correction is due.  Accordingly, this would be the perfect opportunity to squeeze the few shorts holding on with stops above the June highs who think they may be able to exit gracefully at a lower price.  With Leading Indicators at 10:00 am the only scheduled news and any major earnings releases likely to be done pre or post market, we are looking to the first hour of trading to confirm this possibility.

As we write, the ES has posted an interim high at 944.75, which is the highest closing level this year on the continuous futures chart.  This level is key because it is precisely where the ES failed in mid-June after six consecutive days closing within a 6 point range.  A push through 944.75 is significant and a close above more so as it will signal that equities are truly prepared to push higher.  If the ES cannot push through 944.75 in the first hour, we expect a test of the daily gap/pivot area of 934.50 to 937.00 area.  Below that and selling will likely accelerate until 928.50.  New longs will likely enter between 922.25 and 928.50, especially at the lower end of that range.  Above 944.75, there is strong pivot resistance at 951.00 and last month’s high at 953.00 (Sep contract), then 956 to 957.50 including daily R3 and the high on the continuous futures contract.  Fading short above 944.75 is very aggressive, though shorts can fade an early test with tight stops.

Looking beyond today, as we wrote last week, we need to see…

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11:08 am EDT:  So far, the 936.75 point of control, which stopped the overnight market from advancing, has held the day market as well within a tick (high 937.00).  With below average volume, we could see another consolidation day such as yesterday with a marginal breakout movement into the close.  If 937.00 is exceeded, we will probably see 942.75 to 945.25 at most.  To the downside, 922.50 to 924.25 will likely contain.

The Precise Take – Bulls continue the press into options expiration today

The markets had another day of solid gains into the close yesterday after consolidating during the morning and early afternoon.  The ES has made a trip from the lowest point of control (for Sep 09 contract) to the highest.  However, overnight, the ES has rejected the highest point of control at 936.75, finding value at the lower 928.50.  With options expiration today (some expiring on open, some on the close), we would expect settlement somewhere close to 925.

Much talk abounds as to whether the rally this week is real, that is–are we seeing true strength and leadership that will carry the markets to higher levels?  We do, but will not be lured into the end-of-the-bear-market case unless and until we see continued strength into the close next week after an expected correction in the early part.  With a relatively light news week, earnings will continue to guide the markets.  However, with the bullish hysteria of the large banks behind, a new sector will need to ignite the markets.  Non-seasonally adjusted (NSA) M2 ticked up yesterday for the as of July 6 2009, and we need to see this trend continue over the next two weeks to avert a serious correction into the fall.

As we write, housing starts came out better than expected but has little moved the ES.  As with yesterday’s better than expected weekly unemployment claims report that saw a spike high and rejection, we are seeing sellers winning over buyers on bullish news, which itself is bearish.  Accordingly, we want to see the 936.75 point of control become support rather than resistance for the ES to break higher.  We are bullish above that area and bearish below 928.50, watching 913.00 to 917.75 as a possible reversal area where we would look to fade long.  Above 936.75, we see 945.25 as the likeliest possible high as it is weekly R3, which has not been…

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First, a caveat that this data is over two months old and as of May 9, 2009.  Foreign purchases of long term US Treasuries went from $17.1 B in April to -$21.8 in May–absolutely abysmal.  What appears to be weighing on long term yields (which should have shot up immediately on this data point alone) is the huge increase in China’s holdings of US Treasuries (short and long term), going from 763.5 in April to 801.5 in May (+$38.0 B).  How is this possible if they were only net buyers of $4.0 B in long term Treasuries during the month?  One, they could have stepped up purchases of short term Treasuries, which in the long term is meaningless as to their confidence in the US Dollar.  Two (more likely), the massive net purchases by the UK of long term Treasuries in April of $16.4 B could have been conducted by China using UK domiciled vehicles, as China has done at times in the past. Notably, purchases of long term Treasuries by the UK were again very high for May at $14.2 B. Combined with the record support for the recent Treasury Auctions, this is bullish for long bonds and 10 year notes and bearish for equities over the coming months.

In line with what we wrote in this morning’s report, if long term Treasuries were to make new lows (and yields new highs), the US greatly jeopardizes its ability to finance its upcoming debt needs and the risk of inflation actually increases again as a halt in appetite for and mass repatriation of US debt would require the Fed to buy everything in sight, financed only by the printing of money.  Again, this scenario is too risky to chance, but anything more than a nominal new high in the S&P will indicate this nightmare scenario could occur and the Fed must be aware of the possibility.

Ideally for the Fed, equities and Treasury yields go sideways until we complete the refinancings, defaults and deleveraging that are necessary before the actual recovery can take place.  Clearly, though, the S&P 500 cannot stay in a 100 point range for the next year, so something will give.  Given the mid-term election cycle that will begin next spring in the US, another leg down in the stock market (even a new low) does not truly hurt the current administration if recovery appears to be underway next spring, which would mean a rally off current or new lows has been in place for a few months.

Another scenario (less likely) that we must consider is that the S&P breaks 1,000 and yields make new highs, but does not become unmanageable.  The stock market then begins a very choppy ascent, making only marginal new gains with frequent corrections.  This is ultimately inflationary too (with more risk to the Fed), but could be more palatable to the administration as it will find more public support for its agenda

Tomorrow, we’ll look at today’s 4:30 pm M2 report for additional long term market directional clues.

The Precise Take – Shorts forced to cover yesterday with bulls sights on retesting highs

Though we were on the road yesterday, we posted to the website a few lines in the morning regarding the gap up to the 913.00 point of control.  Once there, the ES never looked back and spring boarded higher forcing shorts to cover early.  At the beginning of the week, we placed a 915-920 target on the ES and considered it very unlikely to see a move above critical resistance at 922.75.  Obviously, the unlikely happened yesterday, especially considering the tendency of markets to reverse the day after permanent open market operations (POMO) are conducted by the New York Fed.  Speaking of which, today is another POMO day, which statistically is an up day with a large rally in the final 45 minutes (3:30 pm to 4:15 pm EDT) of trading.  However, considering yesterday’s deviation from the typical post-POMO profile, the nearly vertical rise this week in the ES and options expiration tomorrow, we would not bet the farm on another monster rally.  Having said that, we could see some short covering in the first hour from margin calls, but would be surprised to see the resistance are of 934.25 (daily R1) to 937.25 (top range of professional unfilled gap area) exceeded.  If it is, the bulls can have a field day and could see weekly R3 at 945.25 tested.

Two critical reports are released today, though neither is usually a big market mover.  Money Supply (released after the close) will provide evidence of the sustainability of this rally.  The three month window between the third Friday of April and the third Friday of July is a historically important time for non-seasonally adjusted (NSA) M2 to give evidence of whether the typical summer correction will be reversed and lead to further gains in the fall and winter.  This year it will be all the more important as the current volatility of NSA M2 is historically unprecedented (going back to the beginning of data from 1980).  Also Treasury International Capital released at 9:00 am will reveal foreign appetite for US investments and more importantly US Treasuries.  With the large gap up in yields yesterday, any weakness in demand will likely lead to a perpetuation of this trend and, accordingly, we have placed it on today’s list of potential major market movers.  If yields break to new highs, the ability of the US government to muddle through the coming refi and default disasters in commercial real estate, Alt-A , credit card debt, etc., will be seriously imperiled and will, instead likely lead to another crisis even as equities make new highs.  That is why we still believe that the Fed’s priority is still low yields and not a higher stock market.  The M2 reports today and over the next two weeks will confirm if this is the case.

JPM came out with a great earnings report this morning and, as we write the weekly jobless report came out better than expected.  After a spike up in the ES to 932.75, the ES has retreated.  If this high holds early, we are willing to…

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We are traveling and with only intermittent internet access, but offer the following:

• Days after permanent open market operations (POMO) tend to be down days, with distributions in the first and final hours.
• The ES is trying to accept value at the 913.00 highest value point of control.
• Shorts are in danger above ~922.

10:45 am EDT:  The probe up to test the GS earnings report pre-market high of 904.00 filed early and now the ES is looking to test at least the 890.75 to 893.25 support area.  Given the action so far, the crucial area for the longs is the lowest 50% retracement off lows of 884.75 up to the day-session-only daily pivot of 888.25.  This would, however be 15-20 points off the overnight high and longs won’t want to have to defend a move that low, especially with markets expecting a range day now.  Below 884.75 and we become much more bearish and the prospects of a paint the tape close diminish.

The ideal situation for the longs is to defend 890.75 to 893.75 and then resume the up move.