August 19th, 2011
Bearish activity in Treasury futures options!
There weren't any economic releases to guide trade, so it was all about Europe. Unfortunately, the Euro zone seems to have moved from a state of fear to a state of panic and once the global cycle of volatility gets started, it is difficult to turn the momentum around. European shares were down 2 to 4% for most of their session, triggering another wave of safe-haven buying. The long end of the Treasury curve, and gold, were the primary beneficiaries (despite a temporary bout of early morning profit taking).
Although it has become quite obvious simply by looking at charts, I thought I'd put some perspective on the safety trade. The markets have nominated the Swiss Franc, the Yen, gold and U.S. Treasuries as the place to park cash throughout the most recent wave of volatility. Stats suggest that the correlation coefficients for gold and the Franc vs. Treasuries is near 94! This doesn't offer any help with timing, but it is important to realize that extreme signs of correlation often mean markets are heading toward extremes. Naturally, this can go on for quite some time (you've all heard the mantra "markets can stay irrational longer than most can stay solvent"). When and where traders begin unloading positions in these overcrowded trades, it could be swift and unforgiving for those in the market's way.
We were a little surprised that the 30-year bond future wasn't able to print the 142 to 143 area last night while gold was printing 1880 and the S&P under 1120. Some might see this as a fatigued market and I would somewhat agree but also argue that the lack of panic in Treasuries while the sky was caving in on the equity market could leave some Treasury shorts overly complacent; in turn, one more short squeeze could be in order. However, a move to the 142/143 area could turn out to be a great opportunity for the long-term bears.
BTW, there was a lot of chatter surrounding large option market volumes in long puts, and put spreads...tops are hard to pick, but that doesn't stop people from trying.
We are sticking with yesterday's thought:
It feels like we could get the last hoorah of the pessimistic trade in the coming days (this could mean sharp reversals in equities, gold and Treasuries). If this is the case, the long bond could see prices has high as 143ish, and the note just over 132.
* 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.
**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.
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