Market Notes as of close Thu 26 Feb

• Dollar (as tracked by UUP) over/under area (26.15) holds as support- potential test of Supply (26.25)- Value Area Sideways
• USO previous gap filled after breakout- resulted in new up gap from 26-potential test of overhead supply after pullback met with buy response - Value Area Higher
• IWM/SPY consolidation continues- IWM closes at consolidation low vs. SPY- Value Area Sideways
• 10Yr Bond consolidation continues- Value Area Lower
  

TF

435 Supply/ 456 Overhead Supply

415 Over/Under

394 Demand

USO

26.25 Supply/30 Overhead Supply

25.90 Over/Under

22.85-23.15 Demand

So here we find ourselves midweek and surprise, surprise, surprise- US government auctions $94 billion of notes this week and bonds are selling. NY Composite volume seemed to hit a short term exhaustion near 8.2 Billion shares traded on Feb 20 as we saw breakdown and liquidation/shakeout selling into Nov 2008 (also 2002 Bear Market) demand area. This was followed by a stopping point and subsequent consolidation. Today, we saw large volume especially in the small cap ETF (IWM) and crude ETF (USO) coinciding with the attempts to auction higher. While volume skews in equity futures remain essentially neutral, it may be wise to pay close attention to the action of bond market participants. We have noted the 124 supply area in the 10year remaining an area to contend with and therefore the expectation going forward of a test of longer term demand at/near 120 would be reasonable to infer. A breach of support at 120 and there is a significant vacuum down to the next real demand area at/near 112. Eventually, professionals will turn attention from risk to pending inflation due to government bailout, intervention, and rampant money printing. The intermediate term data suggests those who are long risk (long bonds) are late to the party. IF we should see continued liquidation in treasuries along with some positive action in late contraction period SP sectors Consumer Discretionary (XLY), Tech (XLK), and (Industrials), THEN we could infer this consolidation zone from the Nov lows to likely be bottom formation. It is an interesting challenge in light of the complete destruction of the Financials sector and their business model. 

A wise man recently said, "Credit is not equal to Capital"....

Russell 2000 emini 02.25.09

• 435 Supply/ 456 Overhead Supply
• 415 Over/Under
• 394 Demand
• Options show put bias in CPFL

USO 02.25.09

• 26.25 Supply/ 30 Overhead Supply
• 24.71 Over/Under (Pullback w/buy response confirms breakout)
• 22.85-23.15 Demand
• Options show small call bias in Call/Put Flow Line (Dollar adjusted Volume call/put)

US to auction $94 billion of notes this week.

Russell 2000 emini

A view of the crude auction via USO. 

We will need a Millenium Falcon hyper-drive to combat the pending hyper-inflation our government is creating. 

SP 500 Sectors and Commodity Sectors

Note the previous entry for SP sectors. While gold is getting all the media hype (even though they were oblivious when it pulled back to long term demand at 700), when looking at all commodities, crude oil and industrial metals look interesting for several reasons. First, the crude to gold ratio is at multi decade lows. In fact, we have not seen such underpricing in crude since before 1990. Couple that with OPEC cuts of approx. 4 million bpd, potential disruption of our Canadian tar sand imports (due to new political agendas), innumerable geo-political issues, and it is very hard not to love black gold here. Oh, and there is that 9 trillion dollars the US government just printed....

The second component that make both crude and base metals compelling is the recovery of China. Unlike the US, they do not have the debt ratios we have and therefore the stimulus is likely to be more effective faster there. That translates to increased demand and continuation of the greatest industrial revolution the world has ever seen. 

Therefore, Gold and Silver on pullbacks for long term inflation fighting is sensible, but it seems shorter term Crude and Base metals could shine on like little crazy diamonds as Pink Floyd might say....

 

SP 500 Sectors

• Interesting divergence between financials and all other sectors. It would be reasonable to infer that without the paradigm shift in the revenue model in investment banking going forward, this contraction would likely be much less severe. This illustrates the peril of an economy based on consumer spending fueled by credit created by collateralized debt obligations and Federal Reserve money printing. As Bruce Willis says in "Pulp Fiction", "Zed's dead baby; Zed's dead...."

Bloomberg reports US Govt owned preferred shares of Citi may be converted to common. 

So the bank is clearly insolvent (as though we didn't all ready know) and to top that off the common is likely going to zero. Where oh where have our corporate bonds gone??

Bank America where are you??

Market Notes as of close Friday Feb 20

Dollar saw a sell response and down auction toward its over/under area.

USO saw a buy response on the pullback at/near 23.20- much expiry voodoo to be discounted....

TF/ES (Russell 200 mini/SP 500 mini) continued their SLOW liquidation to the Nov (and 2002) lows

10yr Bond Supply area at/near 124 holds and consolidation is developing.

FOMC Supply above remains area to contend with.

RUT

options showing call bias

456 Supply/471 Overhead Supply

435 Over/Under

401 Demand

USO

options show put bias

26.25 Supply/30 Overhead Supply

24.60 Over/Under

22.85 Demand

Bloomberg reports that Hillary Clinton is "urging" China to continue buying Treasury bonds. 

Apparently she is unaware that the US is an ever decreasing portion of their export business. This reality explains why China will be less and less willing to help finance our government's perpetual and now Obama's profligate spending going forward. China made clear in 2007 that they were interested in repatriating capital into gold and non US debt. I often wonder if the current TIC (Treasury International Capital) data which shows continued buying of US assets by the Chinese is simply their sophisticated method of  supporting their asset valuations while gradually moving that capital. They are, after all, rather sophisticated capitalists to be socialists.... 

Blog Test 1:

This is hopefully the beginning of a more efficient mode of market generated data transfer for those parties interested. Additionally, I hope to create an ongoing flow of thinking based upon volume based supply and demand realities of the marketplace along with observation of the flow of capital through its segments. If successful, we should be able to synthesize all facets of seeming "mass hysteria" related to markets and distill that into market logic.

All that said, to some extent I can't help but think the following of all blogging including my own going forward....