The Precise Take – Equities rebound smartly into options expiration Friday

Treasury Analysis:  With the overbought condition of equities having been relieved and a decent turnaround yesterday to reverse a poor opening on Monday, the markets appear more or less neutral.  The 30 year T-Bond future that we monitor as a barometer of the health of long term Treasuries hit resistance earlier in the week, but has not sold off much in light of yesterday’s equities gains.  At 11:00 am today, the Treasury will announce the auction amounts for the slew of auctions that will occur next week to finish the month’s borrowing needs.  The trend has been for one record breaking month after another and we expect no less to be announced today.  It will be important for the 2, 5 and 7 year auctions to go well next week, especially after last month’s poor showing.  But, with the strength of the recent 30 year auction and recent equities correction, long term Treasuries are in a good position to weather a few hiccups.

Time Profile:  Today is the day after the FRNY’s permanent open market operations (POMO) and has typically had a slightly bullish edge into midday and a bearish edge thereafter, accelerating into the close.  Because the two POMO auctions this week on Monday and Wednesday have not produced the typical tape-the-paint closes (yesterday was simply up from the beginning), we are suspect of the pattern for the post POMO day (today) holding.  Rather, we believe it is likely the markets will consolidate yesterday’s action with a nominal new weekly high possible, but a strong directional movement in either direction unlikely.  Existing Home sales and options expiration tomorrow should be market movers and we will post the Time Profile pattern for OpEx days later today.  Thanks to Billy O’Nair for updating us on the upcoming POMO days—there are two next week on Monday and Wednesday and only one the following week.  Ironically, POMO was intended to support longer dated Treasuries, but has also allowed for the large equities run-ups.  With POMO winding down into October, further gains in the stock market will increasingly need to be made on strong fundamentals rather liquidity injections (that is, unless the FRNY comes up with something else in the interim).

Trading Today:  We don’t have a strong directional bias and would merely suggest longs be cognizant of the tendency of a bearish close after two POMO days in the week.  We are intraday bullish above…

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