Traders,
It was a rather quite day as we sit at 10,000 waiting to make a knee jerk move higher or lower. While it would seem that technically we maybe at a support area - it seems that we continue to pause waiting for the next political or monetary news to determine is we rush out or into equities. I guess the big confidence concern is how the EU deals with Greece, there is several very interesting stories out there - one that states that the EU Charter clearly states that they EU will not bailout another nation, but then there is another rule that states they can bailout another nation if it suffers from a natural disaster or other extreme event beyond their control. I think there probably will be some legal wrangling over what constitutes an extreme event and we all know it will probably be Germany doing the bailing, since most other EU members don't have the capital to pony-up. That probably puts Germany in a "need a favor" mode. So far - it is not clear how this will unfold, but initially it seems they will do something. That notion alone has brought some relief to the markets.
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| 10 year auction
weak! |
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With Bernanke's memo discussing his possible exit strategies, which included the possibility of raising rates - it certainly didn't add excitement for bidders of the 10-year treasuries. The bonds were under pressure and the auction saw a big enough drop of bids that it drove the auction up an additional 10 basis points. While the U.S. hasn't had any issues unloading short-term debt, the Fed stepped in last year to purchase over $300 billion to in Treasuries (primarily long-term).
Additionally, there has been an on-going concern that the Fed has additionally been back-stopping buyers, allowing them to flip the purchase over to the Fed. A couple articles last year created enough concern about the back-door Fed financing that the Fed had to come-out from behind the curtain and inform Congress that they will purchasing $300 billion (as part of their quantitative easing). However, without more investigative journalism and accounting - looking at the CUSPIS on the Treasuries vs. the POMO at the FED - which had reviled some flips - leaves more questions as to how much liabilities that Fed has beyond the $300 billion. Bloomberg sued for full-disclosure and suspects that the unfunded liabilities (which would included several treasury flips) is over 9 trillion. Even Congress (Grayson and others) were unable to get an answer about the unfunded liabilities.
Regardless of all the back-end purchasing of Treasuries, even if some of the bidders are back-stop - the results were not stellar and that sent bond prices down and yields up. One bond trader on Bloomberg said yesterday, I don't know how much capacity there is on the long-dated treasuries and we will most likely see the Treasury move to the shorter end of the curve to meet both capacity concerns as well as keeping Treasury's rates low.
http://www.reuters.com/article/idUSN1057722520100210
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| Weekly Claims
thanks to old man winter? |
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We saw a decent drop in the number of weekly jobless claims filed for the week, of 43,000 - bringing the seasonal adjusted total to -440,000. CNBC was a little concern with how the blizzard that have closed down schools, government agencies, and traffic may have impacted this. If government agencies are closed people can't file. So we may have to expect to see a rise next week in the filing claims if that is playing a factor. For now it is good news and the futures are rallying slightly. The 4 week moving average also fell by 1,000 to 468,500. Other than November, which many suspect was the part-time hiring into the holiday season, payrolls have declined every month since December 2007.
http://www.cnbc.com/id/35345888 |
| Futures Pre-market
Where's the action! |
The Futures turned positive on the positive jobless claim news, expect a higher opening.
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| Support / Resistance
Going higher or lower? |
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This could be a week to get long deltas - but remain cautious.
INDU 10,000 / 10,250 (That 10,000 is looking like it could be a support area, it was pointed out on CNBC that it is holding above the 200 day moving average. While all that might be true, I would hold any long deltas with positive gamma in case we get a slip. Lean long, but treat it as a straddle strike with Gamma.)
NDX 1750 / 1800 (Another MA support area - same play - long deltas are backed with solid gamma.)
SPX 1050 / 1100 (Same here - look for a move towards 1100 - but stay frosty on that gamma against the delta position.)
RUT 600!!! (We did break 600 - but it looks like it is still trying to hold. Again - a good area to get long - but only with Gamma!)
Getting long at these support levels is done with caution. We are at critical levels and while the volatility may have subsided slightly - it could easily rear its head again.
If you get to those resistance levels quickly (after getting long) - FLATTEN OUT !!! This potential rally could be nothing more than a short-term repreive rally.
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| Conclusion
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The equity markets have had the wind knocked out of them recently - not from earnings - rather political wrangling, threats, and monetary uncertainty. The Fed still has its foot on the gas pedal, maybe they are driving a Toyota and it's stuck - but at this point we are printing and spending quickly. EU has some serious issues to contend with as well. I think the emerging markets, with less sovereign debt and not operating a budget deficit are in a better place to hold steady and also give their currency strength. Some refer to them as a defacto commodity currency, rather than a debt backed currency. That could be the longer term winner.
For now we look like we want to rally out of this ditch that has been created in Jan/Feb - and we just might. However, I would be skeptical as to its sustainability as it looks like it would simply be a momentum rally of short-term confidence, rather on a positive shift in fundamentals.
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| Author |
| Michael Williams has 20 years experience as a institututional floor broker and options market maker. He is a partner in both Silexx Financial Systems (a trading software company) and Kinetic Strategic Group (a private investment firm). He co-authored the book "Fundamentals of the Options Market" a McGraw-Hill text and has lectured throughout the country on Options, Risk Management, and Volatility. | |
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