The Precise Take – Correlations gone awry; strength in equities and Treasuries

Leaders Analysis:  We posited midday yesterday that scenario 2 from yesterday’s report was taking hold.  Reprinted, they 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).

With the successful 30 Year auction yesterday, Treasuries soared higher (and yields lower).  However, equities advanced simultaneously, with the S&P 500 advancing over 1%.  We don’t expect long term correlations to hold every minute of every day, but it is rare when a negative correlation becomes positive with material moves in both securities. 

So, we are getting conflicting readings from our leaders.  The strongest movers have been 30 Year T-Bond futures (up) and the EuroYen forex cross (down), which both suggest aversion to risk, and would further suggest topping in equities very soon.  However, gold is up over 1,000 overnight (not as strong a move as the aforementioned, but material), which confirms equities strength, along with lower lows in the US Dollar.  Given our hypothesis that (1) next week’s Treasury permanent open market operations proceeds (likely marking the end of quantitative easing) could  be channeled as never before into ramping equities, and (2) shorts will suffer as greatly as possible before the next true correction, 1053.50 and 1066.00 are still viable targets in the ES.  Looking to next week’s calendar, we could see a spike high on next Wednesday’s CPI or Thursday’s Housing Starts that marks the next interim top.  The only thing that would negate this scenario today is a large directional day down.  Today is an Agency POMO day, so be on the lookout for the possibility of a bullish final 45 minutes of trading.

Trading Today:  We are still basis September for today, and will switch to the December contract Monday.  We are outright intraday bullish over the daily R1’s at 1048.00 and intraday bearish below the daily pivots at 1037.75.  If Consumer Sentiment is in line with expectations and the ES has respected this range, we are willing to…

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