April 21st, 2009

If you like this newsletter, you will love my book "Commodity Options"!  Now available at any major book outlet.

Treasuries inverse equities

As expected, the lack of economic news put a spotlight on the inverse relationship between stocks and bonds.  True to form, as equities slid in overnight trade Treasuries rallied and as the major indices made their way into positive territory, bonds and notes slid. 

Traders were unimpressed with the Fed's  $7 billion purchase of its own 7 to 10 year Treasury securities.  The next buyback is scheduled for Thursday and the central bank is expected to target the 3 and 4-year maturities.   If you recall, the Fed threatened to buy up to $300 billion in securities.  Thus far, they have spent about $60 billion. 

The greenback struggled on the day and appears to be setting up for a correction.  If my assumptions are right, the Treasury complex may be in store for a retest of the recent lows.  However, whether or not this will become reality will depend on stock market action. 

We feel as though equities, despite the potential for a one or two day bounce, will trade below 800 in the near future.  Accordingly, this should keep a floor under bonds and notes. 

Also, according to COT data (Commitment of Traders) small speculators have built up a sizable short position once again.   In the past, when small specs have gotten "too bearish" Treasuries typically find temporary strength.  Therefore, if bonds and notes dip sharply again tomorrow it may provide a good opportunity to play the upside.

In yesterday's commentary we predicted a continuation of the up-move in the T-Bond to 127'20 but claimed to have no directional opinion beyond this area.  After seeing the market's reaction to resistance at this level, we feel as though the market may be setting up for a retest of the recent lows.  This should bring the 30-year bond back to 125, the 10-year note to 122 and the 5-year note to 117ish.

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

April 17 - We recommended to sell the June Bond 118 puts near 20.

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

April 17 - We recommended to buy a 5-year note futures contract near 117'12.5

·         April 20 - Our clients were recommended to take profits today at any point above 117'20 and at or near 118'01 for more aggressive traders.  In this instance, aggression would have paid off.

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

*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.