Below updates a previous chart we posted that breaks up the day into time segments (all times EDT) and plots net points for each period.  Since the January 2010 highs, the first hour is where most of the losses have occurred, even during the most recent upswing.  Since the February low, each other period in the rest of the trading day has been net profitable, though the closing hour the least so.  The 1:30 to 3:00 pm time of day has been the most profitable intraday period for longs since the 2009 rally began.

Looking farther back to 2001, we can see glean some interesting information.  The first hour of trading was consistently profitable beginning late 2003 during the last bull market.  It posted its high in July 2007, three months before equities actually topped.  It also bottomed concurrently with the markets in March 2009.  Similar to 2003, it was unable to trend up for most of 2010, but took off late in the year.  As previously noted, it has since retreated and we believe will need to start turning profitable if the January highs are to be taken out.

The only other time period that was consistently profitable during the 2003 to 2007 bull run was the overnight gap.  If it were to break its current trend line, that would be a very bearish sign.  What also emerges is that, contrary to popular believe, a profitable closing hour is not necessary to sustain a bull market, but may be necessary to start one.  The closing hour’s high was put in January 2004 and trended down thereafter.  The closing hour’s high in the current 2009 rally was established in September.  It may well be that smart money now trades at the open.

Accordingly, if we start seeing overnight gap-ups and profitable first hours, things may have turned around for equities.  If not, we’ll probably see lower prices in March.

The Precise Take – February poised to close on a volatile note.

Leaders Analysis:  Most of the leaders reversed yesterday in line with the afternoon equities rally.  The US Dollar Index is forming a consolidating wedge and is one to watch.  If it were to top this week, we thought it would have done so more convincingly by now; however, as long as it is consolidating, it can still do so, but needs to do so soon.  The 30 Year yield is trading at long term trendline support that has three points of contact since late September, having bounced most recently earlier in the month.  A break down should lead to a test of at least the 200 day moving average, currently at 4.40%.  A concurrent Dollar decline and equities rally is not out of the question, but would be slightly unusual, so this will be an important leader to watch.  A bounce would lead to a retest of the 4.75% level and possible break.

Medium Term Analysis:  Yesterday proved to be a difficult day to predict, as the 1082 to 1085 support level in the ES that we had dismissed the day before indeed proved to be strong support.  Overnight, the ES rallied but rejected the 1107.50 high volume level we have been watching.  Until the ES accepts around this area, it will not be able to move higher.  With three reports today between 9:42 and 10:00 am and rumors regarding Greek debt, there should be…

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10:37 am EDT:  Despite the strong gap down and negative breadth, the day session is relatively quiet with no extreme NYSE Tick readings.  Barring a surprise news event, we don’t expect a trend day down.  1092.50 to 1093.75 should still provide enough resistance to get a day trade short out of it.  We would peg the max low at at 1082.75 and the max high as 1096.25 to 1097.  A close above 1097 keeps the bulls alive for another day and points to a possible bear trap this morning.  A close below 1090 still presages a test of the 1060 to 1070 area.

9:27 am EDT:  The ES is poised to gap below day-session-only S2, which gives the strong possibility of a trend down day.  If bulls cannot rally from the getgo, they are in trouble.  Yesterday’s overnight and day session lows is now a sell area, from 1092.50 to 1093.75.

The Precise Take – The risk trade is at a critical juncture

Leaders Analysis:  The EuroYen sold off again overnight to make a new 52 week low.  In fact, it passed through the 120 level (on the way up) exactly a year and a day ago.  The US Dollar Index is correspondingly up, but only nominally and has not exceeded last week’s high.  30 Year T-Bond futures are up, with the yield breaking moving average support and approaching long term trendline support, despite yesterday’s poor 5 year auction.  It’s increasingly looking like the US Dollar will break resistance and rally higher.  We will know after tomorrow’s GDP report at 8:30 am.  All in all, the leaders are slightly equities bearish.

Medium Term Analysis:  Overnight, the ES sold off from yesterday’s settlement after having failed intraday yesterday to accept in the green value area below.  Jobless Claims disappointed as we write and the ES is down to critical support.  As we said yesterday, if it closes below 1090, it should test at least 1060 to 1070.  There are a number of economic reports tomorrow, which will provide…

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1:11 pm EDT:  The Bernanke testimony provided some early volatility, but not too much as the projected range was fulfilled within a few ticks on each side.  Impressively  for the bulls, the ES has advanced and is now accepting above the projected range, but still below the value area highlighted below in magenta.  We said in the morning report that we wanted to see acceptance at about 1107.50 to facilitate the next multiday rally.  This is the high volume level for this value area and would indicate the ability to spring higher.  Until that happens, the shorts will hang on.  With the 5 Yr auction over and the ES having consolidated since the morning, we should now get an afternoon move.  1099 to 1100 should serve as support for day trade longs to hang on.  We no longer like a short from 1106.25 to 1107.50.

The Precise Take – Markets consolidating ahead of Bernanke testimony

Leaders Analysis:  The EuroYen sold off hard yesterday to strong support at the ~121.5 level.  The US Dollar had already made most of its up move by the open, but did manage to extend a bit on the equities selloff.  30 Yr T-Bond futures had a big up day, rallying to the 20 day moving average.  Overnight, all three are consolidating yesterday’s moves, and are equities neutral.

Medium Term Analysis:  Yesterday’s equities selloff was capped at about the 1090 level in the ES, which did not have much particular significance except that it was just below the lower end of the value area highlighted below in green.  Our hypothesis of the US Dollar topping this week (and supporting an equities rally) was based partly on a cooling of the Greece situation, which instead flared up again yesterday.  Accordingly, we no longer believe that…

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On the heels of the surprise discount window rate hike late last week, and on the eve of Bernanke’s Congressional testimony, speculation abounds as to the when and where of the next round of tightening.  We need look no further than the US Treasury press room, as it has announced today a revival of sorts for its Supplementary Financing Program (SFP).

Remember the SFP?  It’s back, though it really never went away.  Originally created in September, 2008 to provide a pool of funds that could be drawn upon by the Fed in emergencies without adding to excess reserves (before the Fed had the power to pay interest on excess reserves), the SFP hit its peak amount in November, 2008 at $558.9 billion.  Thereafter, it was quickly drawn down to about $200 billion by February 2009, where it remained until Treasury ran into debt ceiling issues in September and announced it would be wound down to $15 billion.  In fact, by January 6, 2010, only $5 billion remained. 

Today, Treasury announced as follows:

February 23, 2010
TG-560

Treasury Issues Debt Management Guidance on the
Supplementary Financing Program

WASHINGTON –The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program (SFP):

“Treasury anticipates that the balance in the Treasury’s Supplementary Financing Account will increase from its current level of $5 billion to $200 billion.  This will restore the SFP back to the level maintained between February and September 2009. 

This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills.  Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted.”  

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We speculated after the September 2009 wind down announcement that it (1) would provide another $185 in liquidity for risk markets as the cash management bills that financed the program were not rolled over and returned to primary dealers, and (2) would increase demand for short term bills.  Since the process will now be reversed, it is reasonable now to believe the outcomes will be reversed as well.  Indeed, as Zero Hedge noted in a similar story earlier, demand is already disappearing from indirects in short term bill auctions. 

With the brunt of the $200 billion cash management bill sales expected to be picked up primary dealers, this will have the same effect as adding up to $200 billion to bank nonborrowed excess reserves (NBER) on deposit with the Fed.  As bank NBER is just north of $1 trillion, a 20% increase over eight weeks in the amount of non-borrowed money locked up at the Fed is material.  At a time when Agency and Agency MBS are drawing to a close, and with M2 money supply flat, this de facto tightening move is a bit alarming. 

Further, using the 13 week T-Bill rate of 0.1% as a proxy for the shorter duration 56 day (8 week) bill, it yields less than half the 0.25% paid by the Fed on excess reserves.  Accordingly, even if existing excess reserves are used to finance the SFP, resulting in a net wash in money locked up at the Fed, the marginal profit provided by this carry trade and so needed by the large banks will be materially diminished.  Under the same net wash scenario, this move could also be a precurser (test run?) for the term deposit facility proposed by the Fed.

For anyone who doubts the intent of these actions, we need only revisit the original press release by Treasury:

September 17, 2008 
 
Today, the Treasury Department announced the initiation of a temporary Supplementary Financing Program. The program will consist of a series of Treasury bill auctions, separate from Treasury’s current borrowing program, with the proceeds from these auctions to be maintained in an account at the Federal Reserve Bank of New York. Funds in this account serve to drain reserves from the banking system, and will therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives.

As the Fed now has myriad tools to offset the reserve impact of liquidity initiatives and is unlikely to restart such initiatives in the near term, this is purely and simply a reserve draining mechanism that will at best erode bank profits and, at worst, shrink an already precariously perched money supply.  We will analyze Fed statistics over the coming weeks and update as to which is the more likely scenario.

It’s important not to become too bearish in the short term on long term news, especially on a net down day in equities.  For those that subscribe to our daily reports, this does not affect our view that the US Dollar is topping this week and due for a modest 38% to 50% correction of the recent up leg.   A concurrent equities rally would still accompany, but we are now less confident in its ultimate potential.  

10:17 am EDT:  The ES traded up to yesterday’s settlement and hovered around until Consumer Confidence came in far below expectations and gave traders a good excuse to move the markets.  The ES is testing strong support of 1094 as we write, but now has a good chance of correcting lower into 1082-1085 today or tomorrow.  ~1099 is now a sell zone.

The Precise Take – Equity futures down overnight on Euro zone weakness

Leaders Analysis:  The EuroYen closed below its 20 day moving average yesterday, after closing above it Friday, and it is down again overnight.  The US Dollar Index is net up from yesterday’s close after hitting fib support overnight.  30 Year T-Bond futures are not saying much as they are forming a consolidating wedge.  All in all, the leaders are equities bearish.

Medium Term Analysis:  Yesterday, equity longs were not able to capitalize on a favorable gap up, with the ES trading below yesterday’s low overnight.  Our guess is equities will correct a bit before attempting to continue the rally.  In the ES, 1094 to 1097 is strong support, containing a long term high volume level, along with the monthly and weekly pivots.  If that cannot hold, there is long term pivot, moving average and fib support from 1082 to 1085.  Yesterday San Francisco FRB President Yellen spoke and attempted to allay fears that the Fed would…

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