Inflation in check and economic data steady
Yesterday we learned that October retail sales ticked to .8% beating expectations of .6%. We saw similarly positive news from the Empire Manufacturing index which was a positive 1.5 for the month of November despite a negative reading of 6.8 in the previous month. This morning, the government released the latest Producer Price Index (PPI) suggesting that inflation was stagnant. We'll get a clearer picture tomorrow morning with the CPI (Consumer Price Index) report, but if it is similarly benign we expect Treasuries to move higher on the news.
From yesterday's newsletter just in case you missed it:
Although it isn't grabbing headlines like the Treasury market is, the US dollar index likely holds the key to our financial future. If you recall, a stronger dollar puts pressure on commodity prices such as gold, crude oil and even the grains. We are also seeing money from overseas investors rotate into the greenback in search of yield and equity market performance. However, if the dollar continues higher, there could be trouble ahead for domestic asset prices.
For instance, if the dollar index breaks above 101.50 it would likely result in a breakdown in commodities (below support levels which have been in place for months, and in some cases years). Similarly, Treasuries could continue to plunge. After all, if foreign investors are paying "top dollar" to exchange their currency to purchase securities, current Treasury yields won't be worth their while. They'll be looking to the equity market for gains.
We "think" the low is in for bonds and notes
It usually doesn't pay to think too much, but that is exactly what we are doing. We "think" the path of least resistance in Treasuries will be higher from here (at least in the short run).
Bill Gross from Janus spoke on CNBC today in regards to the financial markets in a post-Trump win. He seems to believe the markets have gotten ahead of themselves, particularly in interest rates, and we tend to agree. After all, central bankers around the world are still practicing policies aimed at keeping interest rates artificially low. Thus, it is only natural for funds to flow out of countries with relatively lower yields and into those with attractive yields such as the US.
The current dip in bonds and notes has resulted in the highest yields global investors can find in relation to the risk of default. In other words, even economic growth and higher Fed Funds rates, could be offset by the fact that investors from Europe and Japan will likely flock to US Treasuries in search for yield.
Treasury Futures Market Analysis
**Bond Futures Market Consensus:** It feels like the lows are in. Look for a potential downdraft on tomorrow's CPI report followed by buying.
**Technical Support:** ZB : 152'20 and 149'22 ZN: 125'31 and 124'26
**Technical Resistance:** ZB: 161'19, 163'11, and 166'11 ZN: 129'03, 129'28, and 130'29
Blackrock claims there is $50 million in cash on the sidelines...
If there truly is this much cash sitting in investment accounts waiting for an opportunity to put the money to work, they might not get what they are looking for. Unfortunately, the election night plunge in the futures markets didn't last long enough for stock investors to get in on the fun and the will be anxious to gain risk exposure.
We wonder if this cash will start chasing performance higher. It seems they will have an incentive to do so. For instance, we've already entered what the Stock Traders Almanac refers to as the best six months for the market and investors are excited about the prospects of changes in fiscal policy that could spark economic growth (remember the reality of a positive change isn't necessary, all it takes is perception). Accordingly, dips in the ES might be relatively shallow.
Stock Index Futures Market Ideas
**e-mini S&P Futures Market Consensus:**
Today's trade was disappointing for the bulls, but we don't think the rally is over. We are still looking for 2209ish.
**Technical Support:** 2132, 2083, 2048, and 2028
**Technical Resistance:** 2184, and 2209
e-mini S&P Futures Day Trading Ideas
**These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled**
*High volatility equates to wide pivot areas.*
ES Day Trade Sell Levels: 2188, 2200, and 2209
ES Day Trade Buy Levels: 2166 (minor), 2156, 2148, and 2122
In other commodity futures and options markets....
June 23 - Go long corn futures near 392 using mini contracts (the beginning of a scale trade). Full-sized contracts can be used if available margin and risk tolerance is appropriate.
June 30 - Buy September mini (or full-sized) wheat near $4.47.
July 5 - Add to the long mini corn (or full sized) near $3.45.
July 14 - Sell the corn add-on near 370 to lock in a profit (hold the original entry).
July 29 - Buy mini corn future near $3.33 to average entry cost lower.
July 29 - Buy mini wheat to add to our long and adjust the average position entry to $4.25ish.
August 18 - Sell half of the mini wheat position to lock in a profit of about 20 cents on the add-on contract. We'll hold the original position in hopes of a continued upswing.
August 29 - Sell December live cattle 99 put for about 140 (or $560).
September 30 - Sell the December Fed funds futures contract near 99.52.
October 6 - Buy March Euro strangles using the 123 calls and the 100 puts for about $400. This trade is looking for a sharp increase in volatility.
October 19 - Buy back December cattle 99 put, sell 2 92 puts and 1 106 call to replace it. this slows the trade down and spreads risk away from the current market price.
October 24 - Buy December ES 1950 puts for about 7.00 ($350).
October 27 - Liquidate half of the corn position, which was added near $3.33 to lock in a profit of about 20 cents.
October 27 - Buy December 10-year note 130.50 call for about $220.
November 1 - Sell December 1860 puts for 7.00 to convert our long 1950 put into a FREE bear put spread.
November 3 - Sell the December 130.50 ZN call to lock in a moderate gain (roughly $187.50 per contract before transaction costs).
November 8 - Exit ES put spreads. This recommendation was made in the overnight session in high volatility. Fill quality and timing of exit varied, but most traders made a profit of $500 to $600 per contract before transaction costs.
November 14 - Sell March Euro 100 put for about 41 ticks to lock in $250 to $300 per contract. We are still holding the long call half of the strangle, which is under water.
November 11 - Buy January 10-year note 129 calls for about 13 ticks.
November 15 - Exit short cattle strangle. After all is said and done, most clients were near breaking even, or a small loss after transaction costs. We'll take it given the turbulence.
November 16 - Sell January 10-year note 123.50 put for about 26 ticks, or $406.
November 16 - Go long the euro in a small way using mini or micro futures (near 1.0720).
November 16 - Exit December Fed Fund futures contracts to lock in small profit (about $100 to $150 per contract).
(Our clients receive long and short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information)
Carley GarnerDeCarley Trading (a division of Zaner)
www.HigherProbabilityCommodityTradingBook.com **There is substantial risk of loss in trading futures and options.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in a similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.