November 17th, 2008

See me in the latest issue of "Technical Analyst", Trading Volatility with the VIX

TIC data suggests foreign buyers are looking to U.S. assets again.

Despite the recent rally, Large supplies of Treasury securities seems to have kept a lid on bond and note prices.  However, stability in the U.S. dollar has attracted attention to the demand side of the equation.  This morning's Treasury International Capital System data suggests that foreign investors were largely net buyers of U.S. backed securities. 

If overseas capital continues to flow into domestic markets, Treasuries will likely benefit.  While we are likely approaching a near term top in bonds and notes, there will be a floor in pricing and wouldn't expect a break of the 112 long bond lows anytime soon.

In the near-term however, Treasuries are getting close to technical levels that may spark a corrective move lower.  We stand by our resistance level of 118'15 in the 10 year note as well as our recommendation to sell at this level.  However, we may look to hedge this position as events materialize.

The 30 year bond futures contract may ultimately be headed for 121, but we are shopping around for short call option opportunities.  I like selling the January 130 calls for 25 ticks or better, but slightly more aggressive traders may look at the129 calls for 30 (this was getting filled today). 

Traders described volume as light with some pockets of size.  The financial markets have arguably been plagued with a lack of volume since the beginning of the summer.  While summer doldrums may have caused the lack of action in the third quarter, recent inactivity seems to be the direct result of speculators cutting back.  For example, many individual traders and hedge funds were likely hurt in the massive stock market implosion and possibly the September Treasury spike that caught many by surprise.  It isn't hard to imagine that some are simply out of risk capital and others have a bad taste in their mouths. 

We strongly believe that traders should be approaching the markets with capital preservation in mind.  If you have been following this newsletter throughout this time, you likely noticed that we have scaled back a bit on the recommendations provided in an attempt to take a step toward conservatism.  We have been comfortable with the associated risks and believe them to be appropriate given market conditions.  Better yet, we have been pleased with the outcome in this challenging environment. 

Treasury Bond Option Trading Recommendations

**There is unlimited risk in naked option selling.

November 18 - I like selling the January 130 calls for 30 ticks or better, but slightly more aggressive traders may look at the129 calls for 30 (this was getting filled today). 

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

November 17 - Sell 1 December 10 Year Note futures at 118'15.

November 4 - Sell 1 December Five year note futures at 115'16.

·         November 11 - Some of you may have acted on the suggestion to buy the 116 calls for protection, the cost was $500.  If not, don't panic...patience is a virtue.

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

There is substantial risk of loss in trading futures and options.