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Strategies & Market Trends : John Pitera's Market Laboratory

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To: John Pitera who wrote (1818)	5/27/2000 12:43:00 PM
From: robert b furman	Read Replies (1) of 33421

Hi John, I'm really glad you posted this today.First off let me disclose I am not educated in futures.I have dabbled with them long ago and currently remain as ignorant as any newbie can be.I disclose this because I hope any dialogue you could provide assumes nothing and is very basic. Just this morning as I often do,I read the Treasury recap on page B24 in the IBD(Investors Business Daily ). GZ as a daily discipline watches the Bonds(he trades them).Often his thinking process that he generously shares with us makes references to the trading going on in the bond market.His notes in the last two days have been even more bullish. I have been focusing on trying to keep up with David Plonk and Carl Hittle with their uncanny reads of E.W.(on the Big Kahuna Thread).Although I can't master the short time period swings I do see the big picture regarding the waves.My best gains have always been long term positional trades and am quite satisfied with the long term yields created by playing the middle 70-80% of the big moves. It is getting in at the perfect bottom that I dream of-not that it is more profitable rather it is mentally less stressful.I ramble on! What tweaked my notice this morning is :The yield on the 3 mo treasury bills is substantially below the fed funds rate.This has happened before and not sounded any alarms.HOWEVER in looking back,WHAT IS UNIQUE is the 3 mo treasury is below The FRB Discount rate. One of the last times this spread increased to a larger degree was the first week of October.This time period is significant,as it marked the beginning of a great bull market in the Naz.The magnitude of the spread was historically high, exactly when the market bottomed. This is a very important reversal to watch and monitor. My questions are this?:Most market bottoms are periods of credit or liquidity crunches ie margin calls in the equity markets. The FRB discount rate is the charge the fed places on banks who don't have the necessary reserves deposited in the federal reserve system (in effect a credit or liquidity crunch for banks).If the banks are over invested in treasuries at a lower yield than the fed charges the will exchange cash for the treasuries to discontinue the inverted yield curve penalty?????? need help here from a real world banker I guess. How does a record open interest in the futures on fed funds rates impact a credit or liquidity crunch? What would settlement on the last trading day of the month do? Timing suggests may is too soon but the End of june looks about right. If october of 98 is any indicator - it takes about a week for things to settle out from expirey. It may be more than coincidental that the previous record of "open interest on these futures" last record level was 46419 contracts on Sept 25,1998. With current open contracts going "thru the roof " to 55517 on a 7 day string of new record level activity up to the new record dated April 18!!! It may not be Holy Grail, but it could be one excellent leading indicator. Now please help me understand what happens when a record level of open interest settles down on a futures contract that involves an increment of 5 million dollars. Is that the proverbial money on the side lines ready to flood the equities market when the institutions confirm they're coming back into the market? Thanks for listening to my ignorance. Bob

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