January 2nd, 2009

What goes up must come down.

The flight to safety looks to now be a flight from safety as investors seek higher returns in riskier assets.  Higher stocks and more details surrounding the government bailout programs put pressure on interest rate products despite an incredibly weak reading on the ISM manufacturing index.  Keep in mind that volumes have been, and were today, ridiculously light.  The lack of participation looked to be a major catalyst in the stock rally and Treasury decline.

It was only a matter of time before the Treasury market corrected what was arguably the largest bull market rally in the history of government issued debt.  In this newsletter, we continually argued that there were far more attractive asset classes than low yielding Treasuries.  We also noted that the typical December reversal seemed to be likely to come a little later this year.  Each of those predictions turned out to be the case.  However, we weren't counting on the move happening while most weren't watching (or trading).  In fact, Treasuries appeared to be building momentum for yet another leg higher.  Although light volume seemed to support the rally prior to this week, it turned out to be the straw that broke the camel's back in recent trading days. 

This was a great example of how the trend is only your "friend" until it ends.  Once the market turned the corner, sell stops placed by those long the market fueled the fire for lower prices.  While I would argue that fundamentals also support the current correction, it is obvious that the recent down-move was technical in nature.  Now that the ball is rolling, we should see the March T-Bond continue its decline to 131, at which time the market may be a temporary buy.  With that said, holiday markets aren't necessarily reliable.  We could see a dead-cat bounce early next week which will create confusion and could extend to 137'18.  Nonetheless, we think that moderately lower trade will be in the cards as the week progresses.

The March T-Note futures should see 122 by sometime next week.  Once again, this market is vulnerable to a corrective bounce early next week but resistance near 125'19 should hold.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

December 17 - Clients were recommended to Sell March futures near 98.84 and buy the March 9875 call for 21.  The total risk is $300 plus commissions and fees (2 of them), profit potential is theoretically unlimited, and this trade gives you three months in the market!

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

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