11:24 am EDT:  We incorrectly identified Wed and Thurs of this week as the two days on which the Federal Reserve Bank of NY would conduct permanent open market operations (POMO).  In fact, it is today (Tues) and tomorrow (Wed).  This increases the likelihood of a correction to be underway by tomorrow (Wed), instead of Thursday.  Regret the error.  Today’s POMO results were for a meager $2 B, so quantitative easing could conceivably continue beyond this week with smaller auction amounts.

After an initial failed test of the 8:30 am spike high to 1048.75, longs have supported the ES in the expected area of 1037.25 to 1039.50 per our morning report.  If the ES accepts value in the upper half of the combined session range (1043.50 and higher), there could be a successful afternoon push to new highs, as we have seen in previous days.  Otherwise, the conditions for this morning’s high being the September high are partially in place.  We would like to have seen a directional push down by now, but a close under 1030 still signifies the top is in for us.  For this reason, we will not be buyers on any further weakness (including test of 1038.25 low), and will instead begin intraday shorting on a break of 1037.00, should it occur.

The Precise Take – Strength in equities leading into critical Treasury auction week

Treasury Analysis:  Today is the first of three major auctions this week for Treasury securities—today is the 3 Year, tomorrow the 10 Year and Thursday the 30 Year.  The 30 Year T-Bond future backed off its major resistance are Friday on the equities advance, nearly reaching the 50% retracement support at 118 7/32 from the August interim low.  As equities are now testing highs, key will be to watch the 30 Year’s reaction this week to the various auctions with 117 4/32 to 118 7/32 containing the Fibonacci box from August lows and VWAP anchored from the June 11 09 low of the year.  If we do get reversals this week in equities (down) and Treasuries (up), it will most likely be from this support area by early tomorrow (though possibly after the 10 Year auction at 1:00 pm tomorrow).  We expect Treasury auctions to be the biggest news items of the week and they should be watched closely.

Gold:  Gold futures broke through 1000 overnight (high of 1009.40 basis Dec 09), but we would like to see confirmation with gold priced in Australian and Canadian Dollars break through swing high resistance from late June to mid-July 09.  Until that happens, we consider the rally based on Dollar weakness, and not yet sufficiently broad based to signal a strong move up.

POMO:  Today is the only day on which the Federal Reserve Bank of New York will conduct permanent open market operations for Treasury securities this week (though it will likely announce another Agency POMO), and the Treasury program is expected to end with next week’s two POMO days (Sep 16 & 17).  The program was prolonged to end in October 09, but will likely reach the $300 B cap in next week’s auctions.  In the unlikely event that the program dollar cap is increased, expect violent moves in both Treasuries and equities.  Both have benefited from the program—Treasuries because POMO supports demand and equities because the proceeds appear to have been channeled into the stock market.  However, the markets may call Bernanke’s bluff and any prediction on an eventual reactionary move is extremely speculative.  Though the day trading POMO pattern of paint-the-tape closes had subsided, it was resurrected with last Thursday’s strong close (it was a POMO day for Agency securities).  The Treasury POMO program could end with a bang rather than a whimper into next week, with every last leveraged dollar from the proceeds squeezed into equities, so just a word of caution to the shorts.

Trading Today:  While we are not surprised to see the ES up again at the highest market profile value area (primarily because of gold strength and the correlation we noted last week), the rally was not on what we would consider a clean NFP reversal.  Rather the move began a bit high (10 points off the lows) to consider the NFP pattern to have held.   Back to market profile, if the ES continues to accept value above 1019-1020, there is a good chance we will see new highs.  If current highs are to be respected, the ES should reject this area by early tomorrow.  We are willing to go long in an early retracement into the daily gap/pivot area of 1019.00 to 1021.75, but become intraday bearish below.  Despite this, we will likely avoid…

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The Precise Take – Markets positioning ahead of Friday’s Employment Report and 3 day weekend

Gold:  Thanks for all the responses to our posts yesterday regarding the breakout in gold.  We will have additional thoughts to be posted intraday today.  For now, gold has indeed advanced higher again overnight, but we don’t expect a confirmation of the breakout until at least tomorrow, if not early next week.

Time Profile:  Today is an Agency POMO day; however, as we wrote Tuesday morning, the POMO edges have dwindled to nothing recently.  Additionally, we believe the Agency POMO effect of the last two months was helped in part because most of these days were Friday’s, which have had a bullish bias since March.  Accordingly, we’re not posting a Time Profile for today.

Employment Situation (NFP):  As we have noted before, the March rally was kicked off on an NFP day, and every subsequent report has been at an important support or resistance level.  As we are now in the bottom range of the week’s range, the probability (if the pattern holds) is for tomorrow’s report to result in a spike low that confirms ~991 as support in the ES, and leads to a rally into next week.  This would also confirm the positive correlation between gold and equity prices.  As always, though, we must be prepared for when patterns break, so it could be that tomorrow’s report will result in an extension of the down move.  We will have more information in tomorrow’s report (published just after the report) for what we expect the resulting move to be.

Market Profile:  As evidenced by the market profile chart below, the ES is still in the value area centered around the 995.25 point of control.  Should it break out of the value area (higher than 1006.00), it will likely test at least the minor point of control at 1016.50.  A quick rejection off that area is a very strong sell signal, but not likely to be reached today.  Above 1016.50, and the next point of control is 1024.75.  If the ES breaks above and starts accepting value there, new highs are likely.  To the downside, a break below 991.75 suggests a test of the 973.25 point of control, again not likely today.

Trading Today:  We are expecting another low range day and would fade the 1004.00 to 1006.00 area short on weakness (quick rejection of the area).  If the ES hangs around in the upper range and starts building volume there, then we would prepare for a move up to at least the monthly pivot at in confluence with daily R3 at 1011.50 to 1012.50, where again we would…

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Hot off the Fed’s non-monetary printing press is the announcement of a change to the criteria of Agency (Freddie/Fannie) securities that it buys through permanent open market operations.  Newly inserted in the FAQ:

What type of GSE direct obligations will the Federal Reserve purchase under the program?

…Prior to August 31, 2009, purchases were focused on off-the-run securities in that category. Going forward, purchases will include on-the-run securities in that category. This change represents a technical adjustment designed to mitigate market dislocations and to promote overall market functioning.

So, the Fed will now buy newly minted Fannie and Freddie debt (are they running out of older debt?).  Overall, not a big leap (it’s only a $200 B program), but another small step up the ponzi pyramid.  Next, expect loosening of restrictions in the much larger TALF and MBS programs. 

Gaming the Market outlines a typical day at the FRNY trading desk.

Step One (08:30am):

• gather information, macroeconomic news
• desk telephones primary government security dealers
• large banks inform the desk about their reserve needs
• NY Fed gather data to provide forecasts of reserves

Step Two (10:30am):

• call to the Treasury concerning its forecast of its balance for the day

Step Three:

• formulate the actions for the day
• forecasts from Treasury, NY Fed, and Fed BoG combined
• interventions are formulated
• trading plan is formulated

Step Four (11:15am):

• conference call links…
• Manager (and staff)
• Director of the Division of Monetary Affairs at Fed BoG
• a Federal Reserve Bank president who sits on FOMC
• proposed actions for the day are detailed

Step Five (11:40am)

• desk traders contact primary dealers and execute day’s program

Update 2:58 pm:  We didn’t expect to proven correct so quickly!  The Fed just announced it is extending TALF (Term Asset-Backed Securities Loan Facility) from Dec 31 2009 to Jun 30 2010 for newly issued CMBS and Mar 31 2010 for newly issued and legacy ABS.  And, no longer will borrowers from the TALF be restricted to using primary dealers (who have the onerous requirement of buying up Treasuries at sloppy auctions).  Now, there are TALF Agents, with four non-primary dealers named today:

• CastleOak Securities, LP
• Loop Capital Markets, LLC
• Wells Fargo Securities, LLC
• Williams Capital Group, LP

No major changes to the Terms & Conditions of TALF, though we expect eligible collateral standards will eventually be loosened again.

Update 3:15 pm:  As to the above list of TALF Agents, all but Wells Fargo appear to be minority-owned and part of the Fed’s Partnership for Progress program.  So why was Wells Fargo thrown in?  Perhaps because it is the largest bank that is not already a primary dealer.

The Precise Take – Continued overnight weakness – will the day session get follow through?

Time Profile:  Today, the Federal Reserve Bank of New York conducts permanent open market operations (POMO) for Treasury securities.  The POMO tape-painting effect has all but disappeared, as evidenced by the charts on page 2. While the noticeable edge was a bullish first hour in July, August reversed the trend with a bearish first hour, mainly due to opening gaps.  Today, we expect an opening gap to the downside, continuing the August trend; however, we can offer nothing more as to the balance of the day from the Time Profile alone.

Trading Today:  Overnight, the ES filled within a tick the market profile volume gap that extended to 1010.50 after selling off at the September 09 contract’s highest point of control at 1025.50.  We would be sellers on an early retracement to the daily gap/pivot area of 1018.50 to 1021.75.  We would also sell a spike high and subsequent reversal on the 10:00 am reports as long as…

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The Precise Take – Stocks able to bounce despite strong demand at 7 Year auction

Treasury Analysis:  We wrote yesterday that the inability of equities to make gains off bullish to neutral news this week was bearish.  However, their ability to rally in the face of the above average 7 Year auction yesterday is bullish.  It looks like the strong resistance area we noted yesterday in the 30 Year T-Bond futures is proving too difficult to traverse, and without money flowing into Treasuries for the time being, equities are able to gain. 

Time Profile:  Today is a day on which the Federal Reserve Bank of NY will be conducting Agency permanent open market operations (POMO).  The ES has been deviating more and more recently from the POMO Time Profiles, however, we believe it is prudent to be always at least be aware of the statistical tendencies.  For Agency POMO days (nearly all of which have been conducted on a Friday since June 09), there is a slight bullish bias for the day, especially from the 2:30 pm to 3:30 pm hour, with the final 45 minutes having a slight bullish bias, but tending to be more of a mixed bag as indicated by the range of Net Points (thin grey line).  The bullish bias for the day was much more pronounced from Mar 09 to May 09, but still exists and should be considered. 

Trading Today:  As we write, Personal Income & Outlays at 8:30 am has not moved the markets materially.  Accordingly, we have a bullish bias into Consumer Sentiment at 9:55 am, upon which any significant deviation from expectations will likely lead the direction of the markets for the day.  If it’s within expectations, we’ll likely have a…

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1:25 pm EDT:  Bid to cover ratio was 2.74 with non-primary dealers taking about 63%.  All in all, not bad, though the 30 Yr yield spiked up a bit (and subsequently retraced the spike) on the results. 

The day has turned from bearish to neutral now, so we don’t have a directional bias into the afternoon, except for the statistical tendency to have a bearish closing hour because of yesterday’s POMO.  Accordingly, we consider any positions entered in the middle of the day’s range to be aggressive, preferring to fade the range, with stops close to the extremes.

 The Precise Take – Asian-lead selloff–can a POMO close save the day?

Leaders:  Because 30 Year T-bond futures held support last week and advanced as equities held their ground, it is in very good shape to weather next week’s (likely) record breaking auctions.  We wanted to see a close above 119’08.5 in the 30 Year this weak and, after poking above it Friday, we could get it today.  The announcement of next week’s auction amounts will be this Thursday at 11:00 am.  At 9:00 am today, we will get a look at the monthly Treasury Int’l Capital report to gauge continuing foreign interest in the US’ long term Treasuries.  The data will be six weeks old, but it is important nonetheless.  On the overnight weakness, gold has broken last week’s lows and the EuroYen forex cross is down sharply as well.

Time Profile:  Similar to our comments from Friday, today’s time profile suggests that we could have another strong close, despite likely being net down for the day.  Strong closes on POMO days have historically been reversed the following day.  The July rally erased this edge temporarily with several strong follow up days.  However, with renewed weakness in equities, it may be time to revisit these plays and short weak issues on a strong POMO close.  If the close is weak instead of strong, we would want to see other reasons to short.

Trading Today–Putting it all together:  We do not get intraday bullish unless and until the ES can climb over the 995.50 market profile point of control from Friday.  Below that and we’re primarily looking for shorting opportunities, though we would fade long at the next lower long term point of control at 973.25, if we saw buying come in.  Overnight, the combined day and night session daily S2 has provided support and shorts will want to break this area early to continue the directional move.  Assuming no major disturbances in the 9:00 am TIC report noted above, the key news item for the day will be

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10:16 am EDT:  The bearish trend off the (moderately) bearish CPI data pre-market has continued as expected, but accelerated on a much worse than expected Consumer Sentiment reading, which tends to mirror market action more than lead it.  Hence, the remarkable rally since July has effectively not impressed the average consumer (assuming the data is valid), and this in itself is bearish.

Longs in the ES need to push back above 1006.50 to have a chance at a strong close and will likely defend the 994.00 market profile point of control heavily and aggressive longs could fade long this area on a short time frame double bottom.  New shorts will be difficult to enter as this is shaping up to be a strong directional down day with few retracements.  If the ES rallies off 994, then we would hold out for the 1000 level or 1004, not hanging around short above 1006.50. 

Should the ES close below 994 today, we expect the rally is at least temporarily over and for declines to continue into next week.  Also recall that today is a POMO Agency day, and there is a good possibility of a rally from 3:30 pm to 4:15 pm, so day trader/swing shorts may want to cover prior to this time.

The Precise Take – CPI comes out deflationary – can equities shrug off to head higher?

Treasury Analysis:  Yesterday’s 30 Year auction had solid support, allowing the 30 Year T-Bond future to reverse its prior day loss.  The next test will be Monday’s Treasury Int’l Capital report at 9:00 am, which will reveal the holdings of the big name purchasers of US long term debt, then next Thursday’s announcement for the following week’s auctions of Treasuries, which is expected to continue its uptrend and be for a record amount.  The 30 Year looks to be in good shape short term, but we would like to see it take out the 119’08.5 swing high sometime next week. 

The Federal Reserve Bank of New York (FRNY) had already scheduled POMO for the coming Monday and Wednesday prior to the FOMC announcement.  Based on the tentative maturity range, it looks like they will not be buying this week’s supply (3, 10 or 30 Year).  As has occurred each Friday for the last five weeks, the FRNY will be conducting a POMO for Agency securities today.

Time Profile:  The Time Profile for all Agency POMO days that have occurred on Friday since the beginning of the March rally (n=14) has a slightly bullish edge into mid-day and a very strong paint the tape close.  However, for July going forward, the edge becomes bearish in the afternoon, with a tendency for a weak close.  This could be because each of these recent POMO Agency Friday’s has been preceded by a regular POMO day, which tends to have a bearish close on the following day.  Accordingly, because yesterday was not a POMO day, we believe the possibility of a strong close is greater today than the previous five Fridays, even if the day is net down up to that point. 

Trading Today–Putting it all together:  We weigh the markets’ reaction to news as much, if not more so, than the news itself, and have expected CPI to be…

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