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February 2, 2012  

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Was bond pullback a top, or a reload?

There is no doubt that Treasuries are overvalued from a long-term perspective, but in the short run there is no measure of just how irrational investor behavior can become.  Remember the negative yields for bills in 2008?  Accordingly, bears shouldn't complacently believe that rates "can only go up from here" (which means bond and notes would fall). 

While that assumption is true for those that have unlimited capital and all of the time in the world, those trading in the "now" might have a different experience.  We aren't necessarily bullish but we certainly respect the market's yearning for stop running and torture.  Also, we understand that investors are acting on the fumes of emotion rather than logic; therefore, the old "rulebook" has been all but destroyed.  Being bearish in what has been a decade (or more) bull market, requires that traders patiently sell into strong strength to survive.  Selling quiet markets or chasing them lower simply doesn't work in this environment. 

As discussed in previous newsletters, Friday's government employment report could be the deciding factor on the Treasury market's near-term direction.  Most analysts are expecting that the economy added somewhere between 100,000 and 150,000 jobs last month.  In light of ADPs 175,000 prediction earlier this week, our guess is that any number between 100,000 and 175,000 would be a non-event.  A sub-100,000, on the other hand, could prove to trigger a round of short covering that leads the 30 year bond near 146, and possibly as high as 146'20.  A similar move in the note could see 132'16ish. 

If these levels are seen on an early morning rally, we like the idea of being bearish at such prices...it seems as though longs could be interested in locking in profits and a move to these prices will ensure that a majority of the buy stops have been run. 

From a previous newsletter, but still something to be aware of:

You've likely heard of the VIX, a volatility index based on the S&P 500 but you probably aren't familiar with the MOVE Index.  This is an index created by Merrill Lynch that measures overall volatility in the Treasury market.  Specifically, it is a  "yield curve weighted index of the normalized implied volatilities" that accounts for the 2-year notes, 5-year notes, 10-year notes and 30-year bonds.  The MOVE index is currently trading at a value of 75 after peaking near 116 in November.  Yet, Treasury option prices in the futures market seem to be rather beefy.   

For instance, many clients are currently holding a short 140/149 strangle worth about 46 ticks or $720.  Prior to the August fiasco, traders would have likely had to sell options with strike prices within 2 or 3 handles of the current markets price to collect similar premium.  Either the options are futures are dramatically overpriced, or they are trying to warn us of something.  For now, we are choosing the overpriced side of the argument.  After all, we are headed into a plethora of economic data (namely the employment report) and traders are likely buying lottery tickets on both sides of the market. 

Order your copy of the 2012 Outlook today!

Looking ahead six months, what shifts are foretold in market fundamentals and liquidity? PFGBEST Research will give you succinct analysis that takes the routine blogs and customer communications of their skilled analysts to a new level!

1. What factors will be most critical to institutional forex traders? Why? Retail FX traders also want to know what insights the professional desk traders at PFGBEST have to offer!
2. Energy markets are more volatile, and you need to know what Phil Flynn, one of the best-known energy and commodity commentators in the country, thinks is coming up!
3. What is the likelihood that stock indices will follow established trends, or will there be political lashing out (or worsening economic chaos) that will result in volatile breakouts that the charts are not yet indicating?
4. Precious metals -- retracing to gather steam or not so much?
5. One of the foremost forecasters of USDA grain reports, Tim Hannagan, will advise on changes with U.S. export opportunities (pro and con) plus final tallies on 2011 production, and market psychology going into the New Year.
6. Bob Short gives a short report on livestock and meats markets but don't let his brevity fool you. The man is an encyclopedia of current and past conditions that will provide seasonal trading signals NOW.
7. On soft commodities, researcher/trader Robin Rosenberg asks and answers bigger questions, since climate, weather and global economic factors are so impactful to Third World producers!

Order your copy of the 2012 Outlook today!

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**There is substantial risk of loss in trading futures and options!