December 29th, 2008

Happy Holidays from DeCarley Trading!

Holiday trade still in effect, volume remains light.

Treasuries were wildly mixed on a lack of economic news and trading volume.  After posting impressive gains early on, the 10-year note futures pared gains as the day progressed. Nonetheless, yields on the short end of the curve traded decisively lower while the 30-year bond saw moderately higher yields on the day.  Given the nature of the shortened trading weak and lack of participation, I wouldn't put too much credibility into price moves witnessed in the coming days. 

Trading volume among the financial futures has been dismal at best and that looks to be the case going into next week.  Our advice to you is to stay away from the markets and trading until things pick back up.  Keep in mind that trading out of boredom usually leads to disaster and the light volume conditions that we are experiencing could be a catalyst for irrational trade in either direction (or both).  As far as I can see, the markets will still be here in 2009 and until then we should all try to enjoy the holidays.

From a longer-term perspective, I can't help but feel that in early 2009 Treasuries will fall out of favor.  Investors that clamored to the safety of a government backed fixed income security may just as quickly realize that there are opportunities in riskier asset classes assuming that the world doesn't come to an end.  For example, intermediate to short term municipal bonds, despite being tax-free are yielding rates much higher than that of the 30-year Treasury bond.  Likewise, corporate bonds have plummeted to levels that have created incredibly high yields.  There is no doubt that corporate bond defaults can and will happen, but a well diversified portfolio of such holdings seem to be attractive. 

Once retail and institutional investors grow comfortable with the new world that we live in, money will flow out of Treasuries in search of better returns on investments.  Should this prediction become a reality, we may see price drop sharply...in an even more dramatic fashion than the rally.  In the meantime, however, the trend is up and we don't recommending fighting it. 

Our most recent comment regarding the direction of the Treasury market still holds true:

Our chart analysis suggests that the Treasury train will continue to chug forward into next week's extremely light trade.  A lack of volume has propelled the upside thus far and with many speculators short this market, it will likely continue to do so.  In the meantime, we see potential for the long bond to move to the mid 142's while the note may see 129.  However, despite our short-term prediction of higher prices we believe that a significant reversal is looming. 

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

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.

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.