Same story, different day...stock futures up, bonds down

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Weak economic data, didn't alter the trend

This morning's economic news left much to be desired. Weekly jobless claims ticked a little higher to 366,000 and continuing claims were slightly higher than expected.Traders were looking forward to positive news on the housing market, but housing starts for July were a mere 746,000 (about 20,000 below estimates). Luckily building permits picked up some of the slack with a better than expected print at 812,000.Yesterday's miss on Empire Manufacturing was given a pass because of its locality, but today's draw of 7.1 in the Philly Fed should have been enough to put traders on notice. Nonetheless, the day's news was all but ignored and the markets went back to business as usual...stock index futures were bought into and Treasuries sold.
 
US ZB Treasury Chart

Treasury market flushes weak longs

Both large and small speculators came into the weak moderately long 30-year bond futures according to last Friday's COT Report. However, this week's rather dramatic slide suggests both categories are likely in liquidation mode...and have possibly gone short.Ironically, while this sounds like a bearish development, it might be the opposite. Don't forget that light trading volume sometimes exacerbates price moves. Also, small speculators have a bad habit of shorting bonds "in the hole", only to be sorry they did.Treasuries often see counter-trend trading going into the weekend, so we aren't giving up on the idea of a bounce just yet...although we were disheartened to see a break of 146.Don't forget about the Fed, they continue to be on the buy side of Treasuries. They purchased $1.9 billion worth just today in an effort to keep bond prices high and yields low.

Treasury Market Ideas

Consensus: We aren't giving up on a fall rally, this large dip could prove to be a great buy. A 'normal' market bounce would see 149'22ish firstSupport: 144'02 is the next major support area, but 144'26 will provide a moderate floor(30-year Bond), 131'26 and 131'09(10-year note)Resistance: 149'22 and 152'05 (30-year Bond), 133'26 and 134'25 (10-year note)

Position Trading Recommendations

*There is unlimited risk in option sellingAugust 14 - Buy the 5-year note futures contract near 124 and simultaneously purchase a 124 put for insurance. The put protects the trade absolutely beneath the strike resulting in a total risk of under $300 per contract. The profit potential is theoretically unlimited, but we are looking for a possible rally to the 125 area (which would net between $700 to $900 per contract depending on fill prices, etc.)August 15 - Sell 1 October 30 year bond 142 put near 25 ticks or $390.
 
S&P 500 Futures Chart ESU12

Here is the squeeze, how high is too high?

The VIX dipped below 15 today for the first time in recent memory. Last year the VIX traded near 15 prior to the debt ceiling debacle that triggered a free fall in the equity markets causing the VIX to push 50! Prior to that, in the spring of 2010 the volatility index was near this level, it too was followed by a spike to 50. Based on the data available to me, the last time the VIX actually printed below 15 was in 2007 .We aren't suggesting that a low VIX guarantees the market will run into trouble, but we are saying any long position should be taken with care...and perhaps being bearish at resistance levels (in the mid to high 1420's) is a much higher probability trade. Being complacently bullish can be a dangerous game.We are looking for counter-trend trade in Treasuries, but the stock market has a slightly different feel. It doesn't appear as though the short squeeze is over, although it reached our initial target of 1416. We continue to look for some sort of blow off top near 1428ish. 

Stock Index Futures Market Ideas

Consensus: Bearish on rallies. Look for possible short squeeze above 1400 toward technical resistance (noted below) in the ES to be a bear.

Support: 1383 and 1358
Resistance: 1416 was reached, the next significant level will be 1428
 
 

Position Trading Ideas

None

 

Day Trading Ideas

These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled

Buy Levels: 1408, 1401 and 1396
Sell Levels: 1416 and 1428
 
 

In other markets....

Flat(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) 

 

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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.**Seasonality is already factored into current prices, any references to such does not indicate future market action.

 

There is substantial risk of loss in trading futures and options. Please see full disclosure below.

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