S&P futures are mounting another comeback attempt this morning in Europe, aided by $55 billion in quasi QE from the US Treasury yesterday, with another $41 billion coming tomorrow and $25 billion next Wednesday,
However, the US stock market still has not shown that it can make a higher high in this trend of the past week. It needs to reach 3893 to do that.
Before getting to that level, the ES would need to clear several areas of indicated resistance at 3878, 3883, and 3890. Hourly indicators are in a pause. If they roll over from here, I would expect at least a test of yesterdays low of 3805, or worse. If they resume upticking, with ES passing 3878, then a run back to 3900 would be in order, over the next day or two.
The 5 day cycle projection currently points to around 3910, but that would be moot if they can’t get past 3878.
The downtrend has been a volatile, unholy mess, setting up trendlines, then breaking them soon after. The instability is a hallmark of a market that is short of liquidity.
The Treasury has stepped in to try to ameliorate that with these massive T-bill paydowns, which I’ll call quasi QE. They definitely inject cash into the markets, by redeeming T-bills held by dealers, banks, investment funds, and others. This is unlike actual Fed QE, which passes into the markets strictly via the accounts of the Primary Dealers at the Fed.
The Treasury and the Fed desperately want the dealers and investors getting this cash back to redeploy it in the mid to long end of the Treasury market, which is under severe crisis.
Look at the daily chart of the TLT, the 20 year Treasury ETF, and you get an idea. The TLT is now down 17.5% since last August.
Dealers have historically enormous long Treasury inventories, which are leveraged to the hilt. Virtually all of this paper is bought and held using repo financing. Imagine what has happened to the value of these leveraged dealer inventories, where much of the inventory has been acquired at higher prices. Imagine them getting hit with collateral calls from their lenders day in and day out. If you can imagine that, you understand why this trend is accelerating, and why the Treasury is now taking desperation measures to try to stop it. The Fed will soon follow. How will the market react.
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