May 8, 2009

Not so bad = Good

The major stock indices found comfort in alleviating the uncertainty surrounding the stress tests and the employment report. Each event offered overall negative news but also eliminated many suspicions of disastrous scenarios.

With investors looking at a potential depression in the rear-view mirror, the market is approaching a major crossroads. It seems as though the market rallied prior to the streak of better than expected economic numbers and will likely turn over before expectations begin overshooting reality. On the other hand, we are in a scenario that has never been seen before. There is a significant amount of cash on the sidelines and if investors begin fearing that they are missing the boat, dollars could flood the markets for no apparent reason.

At the moment, we still believe that the market will need to digest the rally if there are any hopes of sustaining gains in the long-run. We can't rule out a run to our noted 940 target, or maybe even 950 if the shorts are really squeezed, but the S&P should begin to struggle. Perhaps next week's option expiration will be the catalyst necessary to get the ball rolling for the bears.

In the last newsletter dated May 6th, we noted that we liked the idea of buying the May 875 put. We actually ended up getting filled on the 880 put near $5.50 and were lucky enough to exit near $10.75 on the dip yesterday. Yes, that's right I said lucky. I like to make it a rule that anytime an option is purchased and can be liquidated at double the entry price in the same session it should be exited.

Dow 9,000? Based on our weekly chart analysis it is possible, but we still feel as though a correction must occur in the near-term. We continue to believe that the Russell will fail to hold above 520 if it sees it. The NASDAQ is in need of a pullback, but it looks to be wanting to move back to 1440 before it happens.

If you are long futures, you should be tightening stops. If you are trading options, buying puts and/or selling calls is the way to go but you must be patient in regards to the entry! Bears must be willing to ride out the potential move to 940.

The Bond Bulletin

Bonds and Notes stable after yesterday's bloodshed

A poor Treasury auction on Thursday sent intermediate and long-term interest rate products in a tailspin. The Fed's attempt to fund their bailout efforts became dramatically more expensive than was originally anticipated as the central bank was forced to raise rates considerably to find buyers for their securities.

What could have been another volatile day in the complex ended up being relatively uneventful. The U.S. employment report painted a slightly better picture than many were anticipating but because the data wasn't overwhelmingly bearish the market took the opportunity to take a breather from the selling.

In our last newsletter, dated may 5th, we noted:

We are becoming increasingly bullish but believe that there is a risk of a large spike low across the Treasury complex. This could put the 30-year bond and the 10-year note near 120. The five-year note could see 116 but looks to be nearing a buying opportunity in the mid-116's.

So far our prediction has been relatively accurate (we will ignore the Eurodollar for now); however, we will know whether or not bonds and notes were a buy at such levels next week. Weekly support in both the 10-year note and the 5-year note has been reached but the long bond hasn't quite reached our intermediate target of just under 119...but it is close enough for us. With that said, another flush to the mid 118's in the 30-year are possible so all positions should be handled accordingly.

Our clients were recommended to sell the June T-bond 117 puts yesterday for about 25 ticks following the large slide in prices. Although things have been a bit rocky, it looks as though we should see enough premium burn on this position in the near-term to buy it back with a decent profit in the coming sessions.