January 30th, 2009

Turning the corner, or counter-trend Friday?

Bonds and notes waffled the unchanged mark but seemed to be leaning slightly higher in terms of intraday momentum.  Some are chalking the sharp intraday rallies to position squaring ahead of the weekend but I am looking at Friday's action as what could be the  beginning signs of life in Treasuries.  After being beaten down over fifteen handles (rightfully so) the 30-year bond is likely due for a corrective bounce higher.  I have been noting a downside target of just above 126, now that we are there I am cautiously looking higher.  The bears may be surprised to hear that projections are calling for 132'15 ish.  Note traders may see a rally to 125.

Erratic trade in equities likely frustrated interest rate traders, as volume and volatility seemed to dry up as the session progressed.  As was I, many were likely ready for the weekend.  It seemed as though many were gone by the time CNBC announced that  a possible failure of the government's plan to create a "bad bank".  The plan was intended to relieve banks from tarnished assets added to the economic pessimism.  Perhaps after having a chance to digest the news and what it may mean to the financial markets will prompt Treasury buying early next week.  This could be magnified by profit taking by the short traders. 

Also tempting Treasury bulls, the fourth quarter GDP showed a contraction of 3.8%.  While this was better than the 5.5% expectations, it is hard to twist it into a positive.  The Chicago PMI was reported at 33.3, well into contraction area and the University of Michigan consumer confidence index is still hovering in the 61 area. 

If you took our recommendation to buy the 5-year note, you may have gotten out this morning with a nice profit.  If you are still in, be prepared to ride it a little below 118. 

If you took the Eurodollar recommendations below, you should be out by now with a profit.  We are actually turning short term bullish, I like buying the March Eurodollar near 98.75 looking for a quick move higher.  We don't expect the March contract to break out of its trading range...and it is a slow mover anyway.

Sorry so brief, enjoy your weekend!

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

January 29 - I like selling the March 117 puts for 30 or better, if filled be sure to take a quick profit if the opportunity presents itself!

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

January 27 - Buy 1 March 5 year note at or near 118'03

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!

·         January 8 - If prices rally to 9915, this may be a good opportunity to liquidate the long call at a profit and hold onto the short futures contract. 

·         January 9 - Those that took the original recommendation were encouraged to take profits on the long March Eurodollar 9875 call as noted in yesterday's report.  It was also possible to replace the protection with the cheaper February Eurodollar 9912.5 call.

January 9 - If you didn't participate in the original Eurodollar recommendation, you may want to consider a similar trade.  This morning we were recommending that our clients sell the March futures contract near 99.16.  Those that were uncomfortable with a naked short were advised to purchase the February Eurodollar 9912.5 Call for about 13 points or ($325).  This limits the risk to the amount paid for the option minus the difference in the futures fill and option strike price.  Thus, assuming the fills noted above the risk would be about $237.50 plus transaction costs. 

·         January 15 - Clients were recommended to buy the futures contract back at 98.93, assuming the fills above this locks in a profit of 25 points on the futures contract or $575.  However, this doesn't consider the loss on the long call.  Nonetheless, it guarantees a profit of at least $300 before commissions and fees even if the call expires worthless.  Hopefully a market recovery will allow for exit of the call at a better price. 

*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.

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 and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  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.