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September 22, 2011  

See you at the Futures and FOREX Expo in Las Vegas!  Don't forget the book signing Friday at 5 pm at the Traders Press booth    

Bond bulls take charge

 With the Fed on the buy side of longer dated maturities, few traders are willing to get in the way of what looks to be a runaway train.  Nonetheless, I think we can all agree bonds in the mid-140's is probably based on "what might" happen rather than "what is" happening.  That said, the first rule in trading is to accept that the only thing that matters is what the market is "saying" not what most are "thinking".   

Bonds and notes started the day off in the green and only became greener as the day wore on.  However, it was a rather ridiculous reaction to a Financial Times headline that kicked up mid-day volatility.  According to FT, the European officials were looking to speed up plans to recapitalize the 16 banks that were close to failing stress tests conducted over the summer.  Of these, seven are Spanish, two are German, Greece and Portuguese and one from Italy, Cyprus and Slovenia.  The move was done in attempt to stabilize panicked financial markets but actually had the opposite effect.   

In the midst of mass liquidation of nearly all assets (other than Treasuries) it was easy to overlook the day's economic news...which was bearish for Treasuries and bullish for stocks!  Leading indicators printed a gain of .3% vs. expectations of .1%.  The FHFA housing price index ticked up to .8% and initial claims fell by 9,000. We've been looking for the 10-year note to find its way to 131'26 and had a feeling it would drag the 30-year up with it in today's session but we certainly didn't see 146 coming.      

Tomorrow will be tricky simply because nervous investors might be reluctant to buy stocks or sell bonds ahead of a weekend; yet charts and the tendency for a counter-trend Friday suggest a roll-over.  We are cautiously bearish going into tomorrow and early next week but can't rule out another round of overnight buying that pushes the note to the mid 132's; if this happens bonds could see 147ish.   

If the tides turn, our first downside target will be about 140 in the 30-year bond. 

 Treasury Bond and Note Option and Futures Trading Recommendations

**There is unlimited risk in naked option selling.  

9 - 6 - Some clients are holding synthetic puts in the 5-year note in which they are short December futures contracts and long December 123 call options.  Depending on entry, total (limited) risk on the trade is between $700 to $800 and we have until late November for something to happen.

9-22 - Clients were recommended to sell the December bond 157 calls for about 30 to 32 ticks.   

*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.