So much for needing to tighten stops on the close, which had a perfect run up to day-session-only R1 at 1005.00.  Today’s highest point of control was exactly the same as yesterday’s (red line at 998.50) and we had a perfect equidistant rotation around it in both time and price.  See the green lines.  Not sure what the significance is, but it is interesting.

Overnight, we’re looking for a range inside the light blue box of 998.50 to tomorrow’s day-session-only R1 at 1009.00.  There are some big things happening pre-market tomorrow morning starting at 7:30 am in the form of Treasury funding announcements and job reports, so the range could easily break in the two hours before the open.

The Bureau of Economic Analysis (BEA) released its monthly Personal Income & Outlays report today for June 09, having retroactively revised their methodology for all previous data to 1929, with most of the material revisions only affecting the last ten years.  Many have looked to this over the past few months and pointed to the increase since last fall in personal savings, which is defined by the BEA as Disposable Personal Income minus Personal Outlays (expenditures).  Though we quarrel with this definition of savings, that’s a subject for another post.  We think it’s ridiculous to assert that people are saving more by any definition because incomes are being reduced and are causing the debt servicing burden to be higher, not lower.

Last month, we compared the May 09 period to October 08 in the BEA’s spreadsheet to find out from where this apparent savings increase was coming.  The reason we chose those two months was simply because Oct 08 was the oldest data available in that particular spreadsheet (and May the latest).  Today, for a quick exercise, we took the June 09 report (download here to follow along), inserted the May 09 to Oct 08 comparison column from last month’s spreadsheet (calculated under the old methodology) into column M, created a new column N that shows compares May 09 to Oct 08 under the new methodology, and inserted another column P comparing the latest data (Jun 09) to what is now the oldest data in the spreadsheet (Sep 08). 

What we found is quite shocking–not only the deterioration in personal income since last Sep/Oct, but the deterioration as a result of the revised methodology.  Last month’s (May) report showed a $98.1 B increase in Personal Income from Oct to May, but now shows a net decrease of $173.5 B.  From Sep to Jun (the period used from here forward), it is much worse at -$371.7, most of which is from private compensation, which fell off a cliff (though gov’t compensation increased).  The blow to Personal Income was softened by an increase in government social benefits of $212.6 B (despite the fact that the amount paid in decreased by $54.8 B–is this sustainable?).  Personal taxes paid are down $410.4 B (nearly 33%), so record deficit spending is here to stay.

On the Personal Outlays side, all that has been increasing are payments to the government (only by a small amount), and for services in the amount of $38.1 B.  We wonder why the huge uptick in services?  Are people getting more massages, or might these be debt consolidation, mortgage refinancing, and loan modification services?

Also, we note a glaring fault in the Personal Outlays methodology (at least based on the presentation in the spreadsheet–if someone knows otherwise, please tell us).  Apparently, only interest payments are counted as expenses, and not the principle.  So, if you finance a car or a buy a new tv (or tv dinner) with your credit card, the entire amount is counted for that month by the BEA as an expense.  The principle that you pay each month for the next x years is not counted as an expense in the future months (though the interest is).  So, people are buying fewer Hummers now, but still making payments on their old one, with the principle not being counted as an expense.  We understand why the BEA might do this for durable goods–because they retain value; however, we don’t even see a depreciation deflator and certainly cannot justify this for non-durables.  We pose the following questions to readers:

Do you count your car payment as an expense, or do you consider yourself to be saving the principle?  

When you pay principle on your credit card accounts (assuming you carry a balance), do you consider yourself to be saving the unpaid amount of the dinner you charged last month?  It looks like the BEA does.

In conclusion, it’s not difficult to imagine that the savings rate has been negative and getting worse.  And, the increased largess of Uncle Sam has only distorted these figures all the more as it’s difficult to imagine that payments made to the unemployed and those on social security are being saved. (Again, not by our definition of savings–the BEA’s).

With M2 money supply decreasing and consumer spending 70% of GDP, we don’t see true recovery soon.

11:30 am EDT: …and if it does not break 994.50 to the downside by noon, we would not stick around short.  Too great a chance of an afternoon surge.  Will wait for price to break the ~994 to ~1002 range before taking any further action.  Aggressive longs can buy a dip to the 994-996 area.

Looking at the leaders, the only slightly bearish (for equities) thing we see is the 30 Year bond has retraced to nearly its 61.8% support from last week’s range, which level has been the area of reversals in the past.

10:10 am EDT:  We have not read the report yet, but the headline numbers were pretty good.  The ES should be able to push to new highs.  However, we are in the potential reversal zone as we speak with a high of 999.25, which we said in the morning report we would be willing to fade on weakness.   Inability to push to new highs on good news is weakness.  If the ES cannot climb to new highs by 10:30 am, we will only look for shorts until the lower reversal zone at about 985 or until proven wrong (above 1002).

The Precise Take – Nominal new high over night looking ahead to Friday’s Employment Report

Welcome Zero Hedge readers and thanks for the interest shown in our Grand Unified Theory of Market Manipulation supplemental report.  A quick primer for new readers—we are short term day traders, but aim to evolve longer term scenarios with contingencies to enhance our daily trading plan.

After today’s Pending Home Sales report at 10:00 am, the markets will be increasingly looking toward Friday’s always unpredictable Employment Situation Report (Non-farm payrolls–NFP).  Though they do not track the NFP, tomorrow morning’s pre-market Challenger and ADP job reports will be looked to as bellwethers.  NFP days frequently occur around market inflection points, give or take a day, so we will be on alert and describe possible trading scenarios beginning tomorrow.  With the 10 and 30 Year auctions and FOMC announcement next week, we expect much volatility this and next week as bears attempt to make the 1000 area of the S&P 500 a top and bulls attempt to prove the validity of the rally by continuing higher.  Though we expect a correction to be underway by mid-next week, so do many others, and we will not step in front of the bull train, waiting for market action to direct us.

Tomorrow (Wednesday) and Thursday are POMO days, or those days on which the Federal Reserve Bank of New York conducts permanent open market operations and floods large institutions with leveragable capital.  Though these days usually have a tape painting effect, the second day of a back to back POMO set does not necessarily have a bullish or bearish edge.  What we have found is that there is a slight bearish edge in the final 45 minutes of trading into Tuesdays that precede POMO days (n=11).  Last Tuesday did not fit this pattern, but the preceding four in June did, which was after the market was getting toppy in early June.  The sample size is small, so we won’t bet the farm on this, but we will keep an eye out and tighten stops on longs in the final 45 period (should we be long at that point).

Overnight in the ES, after making a nominal new high, support was found around the day-session-only S1.  The ES has been building higher and higher value areas (based on market profile) and has been very consistent in…

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