January 15th, 2009

Mixed bonds and notes as trade looks to equities for guidance.

Treasuries struggled to make progress in their direction on Thursday as trade looked to Wall Street for help in pricing government backed assets.  Conventional wisdom suggests that it will be necessary for the major stock indices to hold current levels in order to thwart the rally in interest rate products but the markets are anything but conventional in recent months.

Both daily and weekly chart analysis suggests that the March 30-year bond could see prices as high as 144 in the event of another stock market plunge.  Keep in mind, that many chartists (including myself) have mapped out the possibility of the S&P trading in the 650 to 670 range at some point in the first half of 2009.  Such targets are difficult to grasp, but should be kept in mind as you construct your trading strategies.

Again...Fed members are speaking of the possibility of purchasing "significant quantities of longer-term securities such as agency debt, agency mortgage-backed securities and Treasury securities to reduce borrowing costs for a range of longer-term instruments."  Today, the remarks were from Charles Evans, president of the Chicago Federal Reserve Bank.  The idea of fighting the Fed has kept many sellers on the sidelines. 

The negative correlation between stocks and bond has become obvious in recent sessions.  However, as stock trade becomes more erratic would could see another temporary disconnect from the relationship.   Such shifts in market characteristics hinder speculation.  Nonetheless, it seems as though there is potential for bonds and stocks to go up together as Treasury traders may not buy into the option expiration rally in equities. 

If today's newsletter seems to be "wishy washy", it is because it is.  We aren't willing to take a directional stance going into tomorrow's session due to light volumes in the financials and uncertainty regarding Treasury traders interpretation of the potential stock rally. 

Friday's tend to be counter-trend days, so if I was a gambler I would look for a digestive day that could bring the 10-year note to support near 126'10 and the 30-year bond closer to 136. 

If you took our advice in trading the 5-year note on the short side looking for a small gain, you likely came out ahead.  However, we recommend moving to the sidelines as we believe that there may be much better levels to  be bearish in the coming weeks. 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

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Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

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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.