10:47 am EDT:  Of the three scenarios from the morning report, 2 is the frontrunner now:

1)     The majority of the leaders are correct and equities will correct today.   This means we either have a perfect double top at 1038.75, or we will get an extension beyond the highs, which will be reversed late day.

2)     The majority of the leaders are correct, but will tread water while equities head higher and eventually reverse next week.

3)     The majority of the leaders are incorrect and equities will continue to post new material highs with the leaders reversing into next week (gold higher, Treasuries and the Dollar lower).

Mainly, because we still expect a final short squeeze and it is unlikely to happen today.  With only the 30 Year auction left on the news calendar today, it would take a serious failure to pump equities to new material highs. 

Accordingly, we’re willing now to fade the range from upper (1036.25 to 1039.50) to lower (1027.50 to 1030.00).  If the extremes are violated by more than a point without a quick reversal, we could have a breakout and will no longer fade.

Summary:

• Improvements seen in semiconductors, entry-level housing and, of course, autos
• IT services, health care/pharma, aerospace and discount stores remain solid
• Anything to do with finance, commercial and residential construction and high-end products remain weak

A LIGHTER SHADE OF BEIGE

The Fed’s Beige Book is a wonderful collection of real-time anecdotes and insights regarding the Fed districts’ assessment of the economy and financial markets. In particular, we have long used the report as a vehicle to isolate sector shifts.

Sectors that were WEAK but are now IMPROVING:
• Tourism
• Staffing firms
• Railroads (over trucking and air freight)
• Small parcel service firms
• Automotive (cash for clunkers)
• Paper products/containerboard
• Chemical manufacturing
• Semiconductors
• Entry-level housing
• Grocery chains
• Apparel retailing (youth)

Sectors that are SOLID and remain SOLID:
• IT Services
• Health Services
• Pharma
• Aerospace
• Discount stores
• Public construction (roads)
• Food manufacturing

Sectors that were SOLID but are now WEAKENING:
• Tobacco
• Oil and gas drilling

Sectors that remain WEAK:
• Financial services
• Commercial construction
• Luxury goods retailers
• Appliance manufacturers
• Home and garden centers
• High-end real estate
• Multi-family housing
• Commercial real estate
• Coal mining producers
• Electric utilities
• Heavy trucks
• Restaurants

The Precise Take – Overnight, the eMini S&P 500 tests contract highs to the tick

Leaders Analysis:  Markets had priced in strong demand at yesterday’s 10 Year auction and equities closed strongly.  30 Year T-Bond futures made a hammer bottom on the daily chart, spiking nearly to the 61.8% support.  Gold continues to back off from the 1000 level and the US Dollar index is respecting trendline support.  Nearly all the market leaders are pointing to lower equities; however, equities refuse so far to obey.  The lone dissenter among the leaders (or at least neutral) is the EuroYen forex cross, which is at its 50 day moving average, but is not yet showing reversal signs to confirm the other leaders.  The two most likely possibilities are:

1)     The majority of the leaders are correct and equities will correct today.   This means we either have a perfect double top at 1038.75, or we will get an extension beyond the highs, which will be reversed late day.

2)     The majority of the leaders are correct, but will tread water while equities head higher and eventually reverse next week.

3)     The majority of the leaders are incorrect and equities will continue to post new material highs with the leaders reversing into next week (gold higher, Treasuries and the Dollar lower).

1 is the most likely, but 2 is gaining ground quickly.  Everyone seems to expect a September correction, which we believe will come, but will likely cause considerable pain to the shorts before occurring.  Currently, we don’t believe the shorts have hurt enough and believe an extension to the next upside target of 1053.50 (a major 50% retracement on the continuous futures chart for the ES) would be sufficient to cause this.  Today is a full news day and a 20 point extension upwards is at least conceivable. 

Trading Today:  As we write, the ES is advancing on the 8:30 am Int’l Trade and Jobless Claims reports.  Overnight, yesterday’s highest point of control in confluence with the combined session pivot point served as support, and longs will need to keep price above this low of 1028.75 to get another extension.  We will not fade short any strength until late afternoon, if at all, as it is dangerous to…

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