High flying equities and optimistic economic data helped to push yields higher and Treasuries lower on Friday. Although the week tends to end with counter trend moves, each of the financial markets experienced price changes in the direction of recent trade. There could be many explanations for this, but the incredibly light volume leads us to believe the buying in stocks and selling in Treasuries was the result of traders “stuck” in unfavorable positions lightening their load (or maybe even throwing in the towel) ahead of the weekend. After all, a nearly 9 handle move in a little over a week for the 30-year bond could have easily been too much for some bulls to handle.
On the economic front, retail sales were reported at a much better than expected 1.1% (estimates were calling for .6%) and import/export prices were relatively stable. The Michigan Sentiment came in at 57.5 despite expectations for 60 but it was still considered a decent reading relative to the dooms-day environment we were in just a few weeks ago.
The Fed has been actively buying in the long end of the curve compliments of Operation Twist, but they are also active in some intermediate-term maturities. Today, they purchased $4.6 billion worth of securities with expirations from 2019 to 2021 through POMO.
We are optimists at heart but this move in the financial markets has probably been too, too fast…even if the trends continue.
This morning’s economic data was relatively neutral for bond traders. Initial claims dropped modestly to 404,000 and the trade balance was slightly smaller than expected at -$44.8 billion. Similarly, Fed buying, uncertainty over Europe and a seasonal tendency for higher Treasury prices has us leaning higher in the short-term.
The last few days have seen choppy and directionless action and this tends to enable stop orders on both sides of the consolidation pattern to form. Our best guess is that we see some sort of modestly new low (to run the sell stops, of course) before turning around and growing rally legs.
Look for support in the 30-year bond in the mid to low 137’s to be a bull, and in the note this equates to about 127’10.
* 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. Charts provided by Track ‘n Trade, Gecko software.
**Seasonality is already factored into current prices, any references to such does not indicate future market action.
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.
10-7 Clients were advised to sell a December 5-year note 121.50 put for about 24 ticks. This reduces the cost of the trade and hedges against a possible bounce during the holiday weekend.
10-11 Clients were recommended to offset the short 5-year note future and the short 121.50 put for a combined profit of about $900 before commissions and fees and dependent on exact entry and exit prices. However, losses on the original hedge (long 123 calls) diminish the profit. We are looking for a Treasury recovery to give us an opportunity to offset the long call at a much better price (smaller loss).
In other markets….
10-11 Clients were recommended to sell strangles in the November Euro (142/128 for conservative traders and 140/130 for aggressive traders), or December crude oil (98/67 for conservative traders and 96/70 for aggressive traders).
(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information)
Senior Analyst / Commodity Broker
Local : 702-947-0701
*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.