It is surprising (AKA ridiculous) how political posturing and theatrics can move a market. We truly have little idea how the economic recovery is coming along due to the lack of fresh data. However, we do know that our politicians led us to only a minor self-inflicted wound instead of something more catastrophic. Yay! (Hopefully, you sense the sarcasm).
We've recently read several comments and editorials regarding the current valuations and multiples of the equity market. Although we are nowhere near the high flying 2000s we are seeing some similar warning signs. For example, some of the "hottest" stocks today are firms that have yet to make a profit, or are turning very meager profits (think Tesla, facebook, Twitter, Linkedin).
Simply put; there is certainly a lot of froth in the market and this is reason to be on high alert.
On the other hand, the market is just now getting the opportunity to react to the confirmation of the first female Fed Chair, Janet Yellen. She is known for being VERY accommodative; this will likely keep the money printing presses running. Naturally, more quantitative easing is supportive to asset prices...particularly Treasuries.
135 in the ZB will likely be seen by next week
Treasuries are running, and we doubt the rally is over. As Rick Santelli pointed out this afternoon; yields on the 10 year note are "wildly" higher than they were in the spring (meaning prices are far lower). As a reminder, the jump in rates was primarily triggered by "taper talk".
We might be dumb, but we aren't stupid. We know the Fed will eventually begin cutting back on their stimulus programs (particularly bond buying programs) but this month's debt ceiling debacle has likely set them back several months. Don't forget, the Fed's taper was "data dependent"; because data lags the economy by a few months it will take quite a bit of time before they know what damage this month's political folly has caused. In the meantime, QE to infinity and beyond!
Treasury Market Ideas
**Consensus:** 134 resistance was seen in Thursday's session. Friday's are notorious for counter trend, so we could see some back and filling but we still think 135 will be seen on this run.
**Support:** ZB: 131'23, 129'18, and 127,21 ZN: 125'08, 123'30, 122'30 and 121'26
**Resistance:** ZB: 134'11 and 135'03 ZN: 127'03 and 128'01
Position Trading Recommendations
*There is unlimited risk in option selling
Tomorrow is options expiration, so we could see one more day of buying
I think most will agree that the S&P has probably come a little too far, a little too fast. Nonetheless, we are certain there were a substantial number of unsuspecting bears caught with short call options (most likely the 1700 strike). These traders are painfully scrambling to buy futures to cover the risk on their short calls...as a result, they are propelling prices higher.
Markets have a tendency to reach a climax near option expiration, only to reverse course (even if it is temporary) in the following week. We suspect that is what could be playing out here. If the market is in fact running out of steam, any selling likely wont' be seen until after tomorrow's option expiration (early next week). We'll be looking for a place to sell call options against this move in the next day or so.
**From yesterday but still on the table:**
_The talking heads on CNBC were all warning of a "buy the rumor, sell the fact" market. Theory suggests that markets run up in anticipation of a bullish event taking place but once it does, the buying dries up and prices reverse._
_Being the contrarians that we are, we can't help but feel as though the touting of this on CNBC will "ruin" its effectiveness. In other words, if the masses will be looking for some sort of near-term top as the government deal is finally set in stone...we'll probably see the opposite (at least for now). It feels like the celebration rally might extend itself into the mid 1730s before the buying is exhausted. We continue to wait for this level before turning bearish._
Stock Index Futures Market Ideas
**Consensus:** We'll be shopping around for calls to sell in the next day or two.
**Support:** 1689, 1676, and 1652
**Resistance:** 1730, 1735 and 1743
Position Trading Ideas
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: 1715, 1709 and 1701
Sell Levels: 1730, 1735 and 1743
In other markets....
September 19 - Buy a December dollar index futures contract (near 80.35) and a November 80 put option. The total risk on the trade is about $900 plus transaction costs. The profit potential is theoretically unlimited. We are looking for a bounce into the 81.70 area.
October 2 - Buy a December corn futures contract near $4.40 (preferably using minis for most retail accounts). The plan is to add on at lower levels if seen.
(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.**