January 12th, 2009

Continued weakness in stocks results in bond bid.

As was the case late last week, weaker equities and struggling hard assets (precious metals) enticed money back into Treasuries.  Nonetheless, trading volume looked to be questionable, this tells me that much today's buying may have been covering shorts as traders square positions.  With a full schedule of economic data and TARP testimony slated for tomorrow, event risk is perceived to be high. 

Federal Reserve Chairman Ben Bernanke will be speaking early tomorrow morning along with Vice Chairman Kohn.  The two will be speaking of the TARP program as the second batch of bailout cash will be up for approval...or not. 

Atlanta Fed's Lockhart claims that the Fed still has a considerable amount of ammo left to defend the expected economic shrinkage of 4-6% in the first quarter of 2009.  While stock traders seemed to shrug off the comment, bond and note traders appear to have taken it as a sign that government money will be used to buy its own securities in an attempt to artificially lower interest rates. 

We are getting relatively mixed technical signals in the bond and note markets, but some analysts are predicting a retest of the 2008 highs.  At this juncture, I think that it may be too soon to tell but it does seem as though a close above 126'ish in the March 10-year note would suggest that this is the case. 

Additionally, bond and note bears should lookout for the potential of another downdraft in equities.  In recent sessions, the stock selling has been somewhat orderly but if major support levels give way we could see a sharp decline which will simply be the markets way of flushing out the weak hands.  Some insiders that I have spoken to expect that the S&P will see levels as low as 650 in the coming weeks or months.  I have not yet adopted this assumption, but if they are correct the Treasury market will likely break recent highs. 

In a shorter time frame, we are getting relatively mixed signals in Treasuries.  In the case of the long bond, the near-term trend remains lower but there seems to be a propensity for a sizable bounce.  I see resistance at 137'10 and support at 130'17.  However, picking a direction from current pricing is difficult and I wouldn't rush to be on the short side of this market.

The immediate direction of the 10-year note is also a bit uncertain.  The market has been consistently holding near major resistance at 126.  If the strength continues into tomorrow's session I believe that we will see much higher prices as the week progresses. 

If you like our support, resistance and target numbers you should consider trading with us (if you aren't already), we have similar intraday analysis that is communicated to our clients upon request by email, instant message and phone

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!

·         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. 

*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.