January 5, 2012
Part 2 of our discussion on the COT Report in Stocks & Commodities Magazine: http://traders.com/index.php/sac-magazine/current-contents/q-a-a/futures-for-you/873-cot-reportable-or-non
It's all about jobs for Treasury traders
Say what you want about Warren Buffet, but there are two facts that can't be argued:
1. He has made more money in his lifetime than most (or all?) of his critics combined.
2. The man has a great sense of humor. I've quoted him countless times throughout my books and newsletters and it never gets old (at least to me it doesn't). I thought you might enjoy this, I know I did (he is the one dressed as Axl Rose) : http://www.youtube.com/watch?v=V5oYYjJihh4
Treasury futures waffled on both sides of unchanged as traders appeared to be squaring up risk ahead of tomorrow's session. In addition, a volatile session in stocks and a continuation of the never-ending European influence left the market with a mixed bag of fundamentals.
Overnight trade saw a significant amount of flight to quality bidding in bonds and notes; and "risk off" allocation in risky assets. In our belief, had it not been for a shockingly optimistic ADP guesstimate of the U.S. employment report, the day might have ended much differently. In other words, stocks much lower and bonds much higher...after all, that is what the technical set-up was suggesting. Nonetheless, failure for Treasuries to hold this morning's gains leaves the bulls vulnerable but it isn't easy being a bear either. At this point, the best trade is likely on the sidelines in hopes of some sort of resolution to this pattern following the employment report.
Consensus estimates are looking for the unemployment rate to tick higher to 8.6% (but don't forget the number is bogus due to discouraged job seekers dropping out of the hunt). Most are also looking for non-farm payrolls to be 160,000, with private being somewhere in the 200,000 range. However, this morning ADP boldly predicted 325,000 private jobs added so there is definitely some question markets going into the report.
ADP's accuracy is in question, but if they are remotely correct we'll likely see a temporary rally in equities and pressure on Treasuries. We recommend heading into the report flat, but have an inclination to fade the knee jerk reaction. For instance, if things go how we think they might (stocks higher, bonds lower) just before or after the announcement, it might be possible to be short-term bullish bonds and notes from support areas (mid to low 129's in the 10-year note and mid to low 140's in the long bond). If we get the opposite reaction, look to begin getting intermediate term bearish near 147 in the 30-year bond and about 132 in notes. Let's see what tomorrow brings.
* 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.
FlatIn other markets....
12-29 - Clients were advised to sell the March crude 122 call and the 78 put for a combined premium of about $1,000. These options have 49 days to expiration and we believe time value erosion will be most noticeable from 45 to 28 days.
1-3 - Clients were recommended to sell the February S&P 1340 calls for about $8.00 ($400 in the mini contract). We are looking for the market to digest or pullback its recent rally...but prefer to give it room to breathe.
1-3 - Clients were advised to sell the February 123/136.50 Euro strangles for about $700 in premium (56 ticks). These options have 32 days to expiration and are vulnerable to accelerated premium erosion in the absence of a significant change in market fundamentals.
1-5- Clients were advised to buy back the short 136.50 calls in the Euro for about 10 ticks to lock in a quick profit ranging from $200 to $240 (depending on fill prices on the way in and out). We'll look for a place to buy backthe put in the coming days.
(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.