Friday, December 28, 2012

Best Trading Strategy Of The Week - Still Buying US Treasuries On Dips

If you are following govttrader on twitter, you already know the story.  Yesterday afternoon the market shifted value in US Treasuries higher, again.  Using 10yr Treasury futures as our reference point, 132-28 became the center of "value" yesterday (Thursday)...after the center of value originally being 132-16 on Wednesday. 

So, last night, I bought ZN @ 132-24 (documented on twitter), and this morning, sold my ZN to get flat at 133-02 (also documented on twitter) (twitter is the first place to get this info, so please subscribe to the govttrader feed for free). 

The Treasury market is again seeking a price level where buyers and sellers can agree for a period of time so they can transact significant volume just like any normal day (thus far, trading volumes have been pretty slim...but price patterns have been consistent with normal trading cycles).  The problem with this thinking is that we have month/year-end approaching, and there are people who MUST BUY Treasuries.  I'm talking about people who job description includes "purchase US Treasuries at the end of the month."  Unfortunately for those people, their job description is not a secret.  Front-running is illegal in the stock market...but...buying ahead of publicly known buyers....that is not illegal.  There is no guarantee that the price will go up..but trading is not about guarantees.  Trading is about managing your risk, and trading strategies that have a high probability of being profitable if pursued often enough (sort of like being the house at a casino).

I don't have much "new information" to add to the dialogue at this point.  Yesterday's govttrader article was pretty clear, and the twitter stream has all the relevant trading info.  Let this serve as my first public plea for all you traders out there (not investors..traders only) to follow along on twitter and create a dialogue.  I'm open for questions.

Oh, and by the way...the trading strategy is still "buy the dip".

govttrader out

Friday, December 21, 2012

Treasury Selloff Exhaustion Has Reversed - Next Stop - Month / Year End

2 days ago we talked about why US treasuries were cheap (both on an outright basis and on a relative value basis vs stocks).  While I make no prediction regarding the direction of the stock market (Tyler @ zerohedge gets all the credit for that), US Treasuries have outperformed both on an outright basis as well as on a relative basis vs stocks from Tuesday Dec 18, just as we thought they would.  On the blog we talked about using the bell curve and market profile to determine the best location to buy US Treasuries to leg into this trade, and yesterday afternoon / last night we got our perfect buying location (132-03 / -04 in ZN).

So that's all history now...what to do next?

While I expect US Treasuries to outperform stocks and continue to rally up through month / year end, that doesn't mean i want to just stay long and expect treasuries to move up vertically.  Like everything else in the markets, nothing moves in a straight line.  My bias is now to be either long UST (buying on dips) or flat (sell pops).  There can still be some value in getting flat UST on pops, and then re-buying on dips, but we must be careful to watch how much volume trades in the screens so we don't miss the coming undersupply condition (the rare instance where we do get vertical price action after a large buyer asserts their position).  The bell curve and market profile will be our guide for these levels.  I'll be updating thoughts on these ideas and levels on the embedded twitter feed on the blog.

govttrader out...

Wednesday, December 19, 2012

The Treasury Market Appears To Have Exhausted The Selloff - Time To Reverse??

2 weeks ago I talk about how US Treasuries were rich vs stocks (ES in particular), and that monthly cyclicals would force treasuries to cheapen vs stocks.  On Dec 6 (on my prop model) i read 10yr yields as 14 basis points rich vs stocks.  At the time there were 2 reasons why i thought bonds would cheapen.  1)  they were rich on the model graph  2)  there were auctions coming, and the market likes to get short in front of the auctions.   Over the past 2 weeks, treasuries have indeed cheapened (24 bps from peak to trough).   (positive on the spread graph = 10yr cheap)

Now with the last auction of the year out of the way, and price action in the treasury market that appears to indicate an exhaustion, combined with additional price action that indicates short covering today, my prediction is that the time has come for treasuries to go back the other way (ie..time to richen vs stocks). 

With year and month-end only 7 trading days away (and 2 of those are early closes for the bond market), and 10yr yields reading  6 basis points cheap as of this writing (they reached 10 bps cheap yesterday at the height of the selloff), the higher probability trade is to buy weakness in UST while simultaneously buying stocks..expecting treasuries to outperform.  This trade makes no prediction about the direction of the stock market or global risk on / risk off sentiment  (when stocks prices go up, we normally expect treasury prices to go down).  We are just trying to capture the relative difference between asset classes.  December has traditionally been a strong month-end for treasuries.  The cyclicals for stocks are less clear..and the fiscal cliff drama makes this even harder to handicap...but the odds say this position should win more often than not, especially from these attractive levels.

The aggressive trade is just to get long US Treasuries...but the relative value trade is to get long both.  Like most things in trading, there is no guarantee that this trade will be profitable by year-end...but i'm a betting man, and i'm betting that it will.

govttrader out...

Friday, December 7, 2012

Reading The Bond Market Price Action Post-NFP

In order to make sense of the price action COMING OUT OF the number, we first need to know what positioning was GOING INTO the number.  Yesterday, the bond market rallied all the way into the 2pm 7yr POMO (a little unusual).  Since the day before NFP is usually a "position squaring day," we can assume this means that marginal shorts were covering those shorts.  So, with that in mind, the trading portion of the bond market (on the margin) went into this number FLAT or LONG.  So, with positioning out of the way, we turn to relative value.  As discussed Wednesday, UST yields were (and still are though not as much) rich vs stocks (10yr yields reached 14.6 bps rich yesterday). With NFP out of the way, the next major risk events are the 10yr and 30yr auctions next week (there is a 30yr and TIPS POMO Monday and Tuesday, but they should not have a significant impact).

 So, what is the conclusion?  On some days where NFP reprices the market, traders often "fade the move."  I do not think today should be one of those days.  I firmly believe that UST will continue to cheapen vs stocks as we approach the 10yr auction over the next few days.  I don't think I want to take that position into the auction itself...i'd rather cover before that.  However, we have 3.5 trading days to the 10yr auction, and in that time i expect some auction setup selling to take place (a resetting of those shorts that were covered yesterday).  On the margin, I expect the 10yr to continue to cheapen from these very rich levels.  With approx 9bps of cheapening left, i think expecting at least half of that amount (4-5 bps) is still reasonable. 

For those following the the German Bund market, which has completely ignored the US jobs report within the first 30min following the report, remember that EUROPE HAS ITS OWN SET OF PROBLEMS, hence why German 10yr yields are 34bps rich vs US 10yr yields...and the ECB wants to cut rates...yikes!!

more later...govttrader out

Wednesday, December 5, 2012

Catching The Next Swing In Stocks vs Bonds

Today US Treasuries rallied at the same time as stocks (note for newbies...this isn't supposed to happen).  On our stocks vs bonds model (see last weeks post) 10yr yields reached 12.5bps rich vs stocks (1bp richer than month-end).  While I expect bonds to outperform in the 2nd half of December, this next week should see a pullback from this exuberant level as we approach the 10yr and 30yr auctions next week.  For these reasons, I sold 10yr notes @ 100-11, ZN @ 133-26 and ES @ 1413 all at a ratio of 2 ES contracts vs 1mm 10yr notes and 11 ZN contracts.  These levels equate to 10yr yields 12.5bps rich vs stocks (so, i'm short all 3 securities).

More updates and conversation on this trade and the markets on join the fun.

govttrader out..

Thursday, November 29, 2012

Can We Catch The Next Swing In Stocks vs Bonds?

Last week i talked about how to view the correlation trading behavior of stocks (ES) vs bonds (10yr yields).  I mentioned last week how 10yr yields tend to richen vs stocks, typically over the last 3-10 days of the month. 

We have seen this take place since the Friday after Thanksgiving (perfectly within our window), and would not dare attempting to fade this move until after month-end is over, which means Friday afternoon at the earliest.

The month-end richening of bonds vs stocks has been more predictable than the mid-month long-end auction related cheapening, and the fiscal cliff drama will most likely exacerbate market volatility over the next month.  Nevertheless, it doesn't hurt to watch this spread like a hawk and try to catch the next turn (and yes, i am assuming there will be a turn, if only short-lived post month-end).

stay tuned for more on this relationship via twitter...govttrader out

Tuesday, November 27, 2012

Is The Bond Market Just Filling In The Gap?

Will the market spend 6-7 days filling in this current region?  Stranger things have happened.

And putting the last 4 days of profile in does appear that we are filling in the gap left by the strong 30yr bond auction.

more later....govttrader out

Monday, November 26, 2012

Market Profile Premise - There Is A Battle And The Shorts Are In The Lead

Last Tuesday there was a ZN seller from 133-24+ --> 133-19+
Market then traded down to 133-09 and went sideways for 3 low volume days
Monday there was a decent volume ZN buyer from 133-19 --> 133-22+, after which the market returned to 133-17+.

The market has spent the majority of its time today (both before and after the buying) around 133-17+.  Though not very dramatic, I would call that a small "face" to the buyer.  While it is possible that the buyer was actually short covering and not a fresh buyer, I'm not inclined to think so.  With Monday's buyer positioned @ 133-21+ (avg price of buys), and the seller positioned @ 133-23 (avg price of sales), the distance between these 2 traders is small, and yet the seller still seems in control (market has not been able to stay above the buyers price).  While we can't know who will ultimately win out, we will know when it happens.  Either there will be a long liquidation event, or there will be a short covering event.  Both are predicated on pain and commitment, and both will be violent.

While I still believe there will be an attempt for a UST rally for month-end, that may not happen until Thursday / Friday.  In the meantime, we have what seems to be 2 large traders battling it out.

More later...govttrader out

This Week Is 30yr UST Buying Heavy - 10/30 Curve Should Flatten

In a world where flow is the new QE, this week is an alignment of the stars for long end UST traders.  Not only is this the week that the long end tends to outperform due to the month-end index extension (estimated @ +0.07 which is average for a refunding month), but this week has 4 long-end Fed buybacks via twist POMO.  I normally don't take positions overnight or over multi-day periods, but last week and this week are exceptions.  When the 10/30 curve was hanging above 115 last week, that was a gift.  The combination of month-end buying for the index extension this week (real money scheduled customer flow buying combined with program front-running activity) combined with the Fed's unusual activity this week (4 long-end buybacks..that's almost every day and includes extension day) and it should take an act of congress (literally...such as a fiscal cliff resolve) to keep the long end from outperforming this week.  I've been in the 10/30 flattener trade since 115.3 on Nov 20 (very small daily negative carry...but almost zero).  I expect there to be a good push at some point this week to below 112 to provide an exit.  Any steepening moments this week are to be faded.

On the outright market front, UST has outperformed stocks today by 4 bps (stocks are surprisingly unch).

 The UST seller from Tuesday Nov 20 is just about @ breakeven.  If ZNZ2 gets above 133-24, i expect there to be some short-covering activity in the market.

(note for TD thinkorswim users...the generic contract ticker for /ZN and the other long-dated UST futures contracts were rolled early in the software...i suggest sticking with /ZNZ2 until the end of the week to see where the volume is trading)

govttrader out...more later on twitter

Tuesday, November 20, 2012

Measuring The Relationship Of Multi-Asset Classes: Stocks vs Bonds

A number of people have asked me for examples of how i model the trading relationship between stocks, bonds and other commodities.  I've decided to talk about just one relationship on this blog...stocks vs bonds.  While other markets should also be considered when trading multi-asset class relationships, starting out with one relationship is the building block to understanding the myriad of relationships in the market.

While day-trading UST is not a tick-for-tick correlation to trading ES (S&P futures) or anything else, there is a strong correlation between the 2 if observed over a medium time-frame (say 6 months), and the correlation and the relative value "rubber band" behavior between these 2 markets should not be ignored.  Also, when a large volume directional trade goes thru one market and not the other (as occurred today Nov 20 - ES unch and ZN down 11 ticks after a large seller appeared in the UST maket), a dislocation between these "correlated markets" will appear.  If the markets tend to move together in a correlated manor, then these dislocations are necessary for the homeostatic spread to move at all.  Understanding the difference between expected behavior and observed behavior can help in identifying large trades in the market when combined with our other metrics such as Market Profile and Bell Curves.  So, I thought I would expand on how i measure the relative value between stocks and bonds as a primer to trading UST.

There are 3 main tasks to complete before we can use stocks vs bonds as a trading relationship.
1)  The time-frame to use for our analysis
2)  The hedge ratio between these 2 markets
3)  The relative current position of this relationship vs its relevant history.

To determine the best time-frame to help us trade today, we first look at a picture of cross market activity over the last 5 years and tell a story, and then we will zoom in to the past 1 year, and then the last 6 months.

 This 5 year chart of the S&P 500, Crude Oil, EUR and UST 10yr yields is difficult to use to determine an "answer" mostly because there are multiple stories to tell.

In 2008 and 2009, global markets were fairly coordinated.

In early to mid 2010, EUR led global markets down as Europe's problems became known to the masses.  In this case, EUR was a leading indicator, and the other markets (ES and 10yr yields) lagged 3 months behind.  By the time these other markets caught up to the Europe story in mid 2010, the EUR had already bottomed and began its recovery.

After the 2nd half of 2011 (1st week of august 2011 - S&P drops from 1340 --> 1101...18% drop in 1 week), stocks and UST were bought en-mass and decoupled from the other markets (notice the spread widens) from the expectation that the Fed would "print and buy its way out of a recession."  These decoupling events are short and violent in nature.  There is a shock, one market shifts away from the others, and then trading resumes along normal hedge ratios until either another shock, or the mean reverting force of the markets brings the decoupled market back in line.

If we now zoom in on the last 1 year (the period following the last Fed induced equity buying shock), we can see that the general nature of the markets are, more or less, coordinated.  The coordination is not tick-for-tick, or even in time alignment, but in general over a weekly or monthly basis, the markets move in and out of line in a mean-reverting fashion.  This is one of the holy grails in trading...finding a mean reverting relationship that is tradable. 

If we zoom in again on the last 6 months, we can see even easier how the markets move together in general, but in a mean reverting fashion.   In particular, look at how the green line (10yr yields) zig-zag around the red line (S&P futures) and the blue line (EURUSD) and even the black line (crude oil).

If we use the last 6 months (or even the last 1 year) as the benchmark time-frame for our analysis, we find the best stocks vs bonds hedge ratio to be  10% .  That's (0.1) * S&P - 10yr yield in basis points.  We then normalize for the most recent period (the past 6 months) by subtracting 30 basis points.  This give us a formula of :
{  10yr Yield in basis points - 0.1 * ES Price - 30  }

Plugging in current market prices gives us:

158 - 0.1 * 1352 - 30 = -7.2
In simple tradable instruments, to trade this spread requires 2 ES contracts vs 11 ZN contracts.

If we graph the last year of this spread relationship, we get this:

In this graph, downward motion in the line represents 10yr UST richening vs stocks (remember that UST and stocks should move inverse to each other...stocks up should = UST price down = UST yields up).  By using a model spread graph instead of individual instrument graphs, we can more clearly see the relationship between the 2 markets.  This model makes no statement regarding the inherent value in one market vs another.  It simply displays and measures their behavior assuming our hedge ratio is accurate.

As you can see, during the 2nd quarter of 2012 there was a shift in sentiment between stocks and bonds stemming from the accumulation of central bank monetary expansion.  Call it a "forward looking inflation cliff" for lack of a better word.  As the Fed continued to print (and the market priced in more) USD to buy UST and MBS, the wall of printed money eventually overcame the historical trading relationship, creating a divergence in the spread.  The divergence took from March to April to materialize, and after the divergence (a move of 40 basis points), the trading relationship between stocks and bonds resumed to its 30-40 bp range.  This is just another example of a spread trading within a homeostatic spread range, followed by a paradigm shift, followed by range trading around a new homeostatic spread.  While changes in the homeostatic spread level occur periodically (1-2 months out of the last year), range trading dominates the landscape.  Like many other things in the capital markets, identifying the change in the level of the homeostatic spread is more art than science, but we can use our other tools (such as market profile and bell curves) to help identify them.

The first piece to this spread puzzle is to understand the proper hedge ratio between the 2 markets and how to use it.  I've done the work, and determined that for the time being, 10 points in ES normalizes into approx 1 basis point on the UST 10yr.  So, if you wanted to trade or just observe this relationship, the above formula and graph show you where the relationship is, both in its historical context, as well as in live trading terms.

Its difficult to show on this graph, but if we zoom in on each month individually, we can see that the 10yr UST consistently richens vs stocks as month-end approaches (typically over the last 3-10 days of the month) (the only exception is November of last year).  From the flows that i've talked about in this blog, we should all now understand why that is the case.  This spread graph is simply a visualization tool to help observe phenomena such as month-end. 

Perhaps even more important than attempting to trade the stock vs bonds spread on its own is using the information that watching the spread conveys when using the spread to understand what is happening in each individual outright market.  On days where the 2 markets are not moving in correlation, the spread will help you tell a story about what is happening in the market with the larger relative trading volume.

Watching and trading a spread like this tends on its own to only provide 1-2 high probability spread trading opportunities per month (because the intra-monthly range is so large), so we need to add other trading models to our playbook.  However, the first step to building a playbook is "one play at a time."  Adding this play to our market profile interpretation of 10yr and 30yr auctions makes for 4 plays to watch for per month outside of our standard Market Profile model.
 If we add our standard Market Profile trading model, that should indicate 2 trades per week on average = 8 trades per month.

While 12 high probability leveraged trades per month is probably enough for most people, (and most single strategy hedge funds) why stop there?   In the future i'll talk about adding Credit, FX and Energy into the multi-asset equation.  We will also talk about "reading the tape."  Most people refer to "the tape" as the executable market for a single instrument.  We here at govttrader look at spread markets as executable also, so "tape reading" involves real-time monitoring of not only the outright markets, but the relationships between markets as well.

Rates traders for example will recognize this as the yield relationship between 10yr yields and 30yr yields (the 10/30 yield curve).  Adding stocks vs bonds gives us another relationship to monitor in real-time in combination with everything else we watch to indicate what the large flows are in the market.  This is the key to trading...if you know where the large trades are taking place, you can be both a trend follower and a range trader, and not get bamboozled when a market transitions from one mode to the other.

more later on the blog and twitter....govttrader out...

Posting intraday trade commentary on twitter.

Sorry for the lack of heads up to my "blog only" readers, but i just haven't had time to write blog posts today...twitter is just so much easier for the running commentary, so i'm transitioning all my short content to twitter.  I'll be posting a blog article i'm writing about correlation trading stocks vs bonds shortly...but for the intraday trading commentary, i suggest you follow me on twitter.

govttrader out...

Friday, November 9, 2012

Thursday, November 8, 2012

30yr UST Auction Preview

Today is the 2nd of the long-end UST auctions for the month of November (16bln 30yrs will be sold to the market at 1pm...largest single DV01 event of the monthly cycle).  This will be a new 30yr (new cusip, maturity date, coupon, etc..).  Buying bonds in these auctions and holding for 24 hours has been a winning trade for the last 14 new 30yr auctions (that goes back 3 1/2 years since the start of monthly bonds and QE).  Normally, the long end of the UST market has either been selling off or significantly cheapening vs stocks at this point in the monthly cycle.  Today is one of the rare instances where this is not the case (must adjust today's 10yr yield for a 4bp roll to see this is the case).

30yr auction previews have the benefit of analyzing the previous days 10yr auction, which is the 2nd largest DV01 event during the monthly cycle (16bln 30yrs are the equiv of 34bln 10yrs...yesterdays 10yr auction was 24bln).  So, lets first do a post-mortem of yesterdays 10yr auction.

Focusing on price action alone (lets ignore predictions about the election results on the market)...leading up to the 10yr auction yesterday, there was a global risk-off trade combined with a flight to safety bid for safe-haven assets, and US treasuries tend to be the primary safe-haven asset.  In the last 30 minutes leading up to the auction itself, somebody took 10yr notes up from 99-28 all the way up to 100-02+ (to be fair, liquidity dries up in that time period).  Before this last minute run-up, 10yr notes had been stable around 99-28/29 for most of the morning.  Why the last minute uptrade into an auction?  That was fear.  Fear from a trader who had planned on going into the auction short...deciding to cover that short before the auction.  Why would a trader do this you ask?  Well, if the past, there have been a handful of occasions where strong demand for UST paper has caused the auctions to come thru...which cased massive violent short covering post-auction.  While nobody could have predicted whether this would or would not have happened yesterday, the result is very telling for us now.  The actual auction result came at an equivalent price of 99-29, so this last minute run-up turns out to have been unnecessary (though to be fair, not expensive enough to break the bank either).  From the 1pm price of 100-02 (the result of that run-up) the auction tailed to come at 99-29.  However, if we ignore that last-minute run-up, we would say that the auction came on-the-screws.  I believe this is the appropriate way to view yesterdays 10yr auction on-the-screws auction where the UST market had been rallying strong all day.  While this means there was not an insatiable demand for UST paper (that would have been a thru result), there was strong-enough demand to buy the paper at the avg price where most of the bonds had been traded pre-auction.  Or, in other words, the dealers bought their paper at about the same price where they collectively set their shorts.

So, to recap, yesterday's 10yr auction was a risk-off UST rally into the auction, followed by an on-the-screws result.  This means there is very healthy demand for UST duration, but not of the blood curdling fear based variety that would have cased a short covering result (indeed, almost everybody who tried the short setup lost money or was flat yesterday).

As i write this, the 10/30 curve (my favorite indicator of 30yr demand) is trading at the equiv of 119.5 (there is a 4bp roll from the new 10yr and the old add 4 to the today's section of the graph).  This is the steeps of the last 2 weeks (expected), but nothing too extravagant as the weekly range has been 114 --> 119.5  (that is slightly tighter range than normal for this curve).   With this months extra 2bln 30yr Fed buyback, i suppose its hard to expect much more steepening than this.  Darn that QE.

Volumes in the UST market are normal for this time of day (they are low for a 30yr auction day), and stocks have flat-lined since yesterdays sell-off, so no new real nuggets of information there yet.

Comparing UST with risk assets, relative value indicates that we are inline, both on a 1 and 6 month time scale.  UST has not cheapened vs stocks in the past week if you look at the 1 month chart and subtract 4bps from the 10yr yield to take into account the 4bp 10yr roll.

On the 6 month time scale, UST vs ES and EUR are also inline.

Last but certainly not least, Fed QE (also known as POMO).  There is a 5 bln 10yr Fed purchase coming up at 11am.  While this is a fraction of today's auction, greed still demands an attempt to sell some 10yr paper as high as possible to the Fed before the 1pm 30yr auction.  Clearly, the 30yr auction dominates in terms of duration, so i expect a touch more 10/30 steepening in the next few hours, but not so much in terms of an outright rally into the buyback like we normally play for to frontrun the Fed.

So, what is the conclusion for today's 30yr auction preview?   I don't foresee a thru auction, as we are trading near the highs of the last month in both price and spread.  There is a moderate curve concession, indicating some curve based demand (the flattener is a favorite trade coming out of this auction) but 4 bps of curve is small...12-20 bps of curve concession are need to be significant.  The outright demand will have to be based on short covering and overall UST demand.  I believe that yesterday fulfilled a large slug of the overall demand for UST paper, and so i don't see the fear based bid overwhelming the market.  There appears to be a bit of exhaustion in this market today.  We have not seen nearly enough short based setup for this auction to cover the duration, so if 1pm comes at current prices (30yr trading 98-12 as i write this), i expect a tail.  Market participants tend to have short memories, and the failure to make money from a short setup into yesterdays 10yr auction will have 2 effects.  For one portion of the market population, there is too much fear to try the short setup again today after its failure yesterday (these tend to be the weak hands) and they may lean towards sitting this auction out.  For the other half of the population, this confluence of events should provide the setup to try for a tail.

For the moment, that's my call...i expect a tail from this auction (or a selloff leading into it), and i want to exit the day with a 10/30 flattener.

more later on the blog as we approach 1pm....and trades will be posted to twitter if time permits.

govttrader out...

Wednesday, November 7, 2012

10yr UST Auction Preview And Morning Comments

The overnight comments made by Draghi (combined with the expected US policy gridlock from Team "O") have spooked the risk markets, and this morning there is a significant flight to safety bid in US treasuries.

Clearly, most traders who held a short outright UST position overnight have stopped themselves out by now (UST market trading volumes are HUGE overnight and this morning).

Nov. 7th 2012   7:12 AM
(Bloomberg) -- Cash trading at 285% of 10-day moving average vs 217% TY, CRT strategists David Ader and Ian Lyngen write in note.

This in itself (short covering) argues for a shot at setting a short 10yr trade.  However, the risk situation today is highly volatile.  Any short UST position should also have a small short risk position to hedge against a dramatic drop in risk as stop levels have been breached (such as ES).

The question now you set a short before the 10yr auction...or will the fight to safety bid dominate the auction and create a "Kobayashi Maru" scenario for the dealers?  The 24bln 10yr auction itself should be able to satisfy any short term need for UST duration, so a post auction (later this afternoon) rally would only be short covering from those who try to go into the auction with a short position and miss the auction.  If that occurs, then I like selling the corresponding pop in whichever UST security shows the most short covering (short covering is always a fade).  I'm sure that with the UST market pausing here over the last 2 hours  (10yr @ 99-28 as stocks just dropped another 15 ES points as i am writing), a handful of traders have taken a shot at setting a short.  The 40 point move in ES today is probably enough for the day (rare is the ES move greater than 40 points).

With the 11am 30yr buyback out of the way a moment ago, i like setting a small 30yr short here @ 98-18 with a pretty tight stop combined with a small short in ES @ 1394.

Trade update originally posted to twitter:

Stepping back from the auction....

Returning to our Elliot Wave guesstimate for broad market direction that we discussed 3 weeks ago...the outlook for stocks doesn't look good.  In Elliot speak...stocks have been filling out an expanding wedge pattern following the completion of a 5 wave cycle.  The next impulse wave should be very large.  While its hard to say when that will happen, the bias is clearly to the downside for stocks (in both the US and globally) over the next few months (excluding some kind of divine intervention).

The only trade that made sense (screamed out really) to take home last night was the 10/30 that bizarre 10/30 flattener that was put on yesterday afternoon dislocated 10/30 from reality (from 119 --> 117 )  (see my twitter comment on that one).

That was short lived as 10/30 quickly returned to 119 overnight and has stayed there (quick low-risk 4% return thank you very much...960% annualized...but nobody does that right??).  The 10/30 flattener trade makes sense coming out of the 30yr auction...but not before.  I still can't get my head around the trader who put on that flattener.   Regardless of who won the election, everybody knows the flattener is a trade you put on COMING OUT of the 30yr auction...NOT BEFORE.

I'll post again as we get closer to the 1pm auction....govttrader out...

Tuesday, November 6, 2012

Long Liquidation

See the big red bar starting at 132-30+ with 83k contracts...that was the long liquidation (plus the 2 surrounding bars = 170k contracts)

Warning - Beware the UST long liquidation

While still lower than expected...volumes in the US Treasury market have picked up.  The probability of a long liquidation from Friday's buyer has just skyrocketed.  We can see the whites of their to be on the lookout.

2 Forces Battling In The Treasury Market - Friday's Large Buyer vs This Week's Auction Setup Sellers

With this week seeing 2 of the largest DV01 events of the month on Wed and Thurs (24bln 10yr and 16bln 30yr bond auctions), the large buyer from Friday will have a tough opponent on their hands. 

Summary of forces to be concerned about in the US Treasury market today:
  • Friday's large buyer
  • Auction related setup sellers
  • The Fed (POMO)
  • COT Report spec longs
  • Risk RV (Stocks vs Bonds)
Typically, the majority of the duration setup (selling current bonds to make room for new issues) for the 10yr and 30yr auctions would be well on their way by now.  In a normal balanced market, this setup would cause the long end of the treasury market to selloff, creating a concession (drop in price) so that the new issues can be purchased at a discount.  This selloff / discount is normally required to absorb the duration of the supply.  This week however, we witnessed a large levered trader take a long position (on Friday post NFP) right ahead of the auctions.  The community of auction participants will still need to sell bonds ahead of the auction.  The question on everyone's mind is...will the large buyer from Friday be proved victorious (create a rally to sell into) or will the auction setup sellers force Friday's buyer to capitulate and liquidate his position into a falling market (this would be a violent downtrade).

Either way, Fridays buyer will be liquidating his position at some point, and the auction related sellers will be flat or long come Thursday's bond auction.  The only question is...does Friday's buyer liquidate at a high price (sell into a fear-based rally), or does he liquidate at a low price (sell alongside the auction concession).  At this point in the cycle, we normally look to risk assets to help give us a clue.

Normally, at this point in the cycle, the expectation is for UST to weaken substantially vs risk assets (S&P futures are usually a good barometer for risk appetite).  If that were happening right now (as we would normally expect it to), then the green line (10yr yield) on the above chart would be moving closer to the red line (S&P futures).  That hasn't happened yet.

With almost all global stock markets showing gains overnight...

I am not surprised that US treasuries have sold off a little. 

I am surprised that US treasuries have not sold off more, given that there are 2 large auctions looming in the next few days.  I blame this lack of concession on POMO and Friday's large UST buyer, who has thrown a wrench in the works of this auction supply process.  POMO will completely absorb this months long end supply.  There are some large auction related short positions that were established yesterday (avg price 133-04+ using ZN....99-14+ using 10yr notes).  At the moment, both of these positions (Fridays buyer and yesterdays sellers) are "in the money."  I suspect one side will press their position today in an attempt to shake out the other.  On a relative value / cyclical  basis, UST sellers have the upper hand.  On an "in the money" basis, Friday's buyer has the upper hand (starts off with more money in the trade).  

One other factor to consider..the CFTC commitment of trader's report.  This report released on Friday indicated the largest long duration position in the US treasury market since March 2008.  These spec longs are not permanent fixtures of the market.  These are traders...and traders like to trade.  This means that there is a large population of spec longs just waiting to sell their position.  They will either sell into a rally taking profits...or they will sell into a downtrade in a long liquidation.

In a market where "flow" is the dominating force, one of the above forces will push the others off a cliff in the not too distant future.  Stay tuned for the party....there should be a significant transfer of wealth coming soon.

This is frustrating for anybody who doesn't have a position yet, as the winner has not been announced.  I don't advise taking a position in the middle of this trading range.  I do advise going with the large trader from Friday.  Primary dealers are forced to bid for their pro-rata share of the auction, so they are forced to sell paper at some point to make room.  These primary dealers do not have room to take infinite P&L pain...sometimes they are forced to short cover too.  We spec traders are lucky in that we have no such obligation.  We can wait and see what the large trader does and follow in his footsteps.  If he sells ahead of the auctions, i'll sell too.  The winner of this battle will be known by a violent trade (either thru short covering from the auction setups, or a long liquidation from Friday's buyer), and this will be clearly visible to all.

For those interested in the worst / best trade for the dealers who traded yesterday:  the worst price action for the dealers would be a stock selloff / UST rally today that forces yesterday's sellers to short cover...and Friday's buyer simultaneously liquidates his position selling into the short covering rally.  If that plays out, then we should finally see a ripe opportunity to set our own short for the upcoming auctions.  Note how we would be selling alongside Friday's large buyer.  If we don't get that opportunity, not made is better than money lost, i always say.

more later...govttrader out...

Monday, November 5, 2012

Update - new read - market distributing higher today indicating supply imbalance

For all those traders scratching their heads, wondering why the treasury market is rallying in front of the big 01 auctions, this blog post is for you.

All that excitement I had earlier this morning, talking about selling a POMO induced pop...and nothing.  The market has been coiling near the POMO related high print (99-17 on 10yr notes...133-06 on ZN @ POMO results).  I was waiting for 133-11 on ZN to sell the mkt, which is about 99-23 on 10yr notes.  I believe (because my model says so) that if the market were to trade up to those prices, we would see heavy selling, taking us back down and thru 132-27 on ZN.  Unfortunately, the market was stubborn today and has been sitting here in the 133-02+ --> 133-06+ range for the past few hours (that's only 4 ticks....a trading range on the order of 12 ticks is more normal).  Trading volumes today are very light (70% of normal for this time of day).

In my first instinct, I see 2 comments on the trading activity today.  First, volumes are light, and price volatility low.  Second, the market seems to be coiling around this new higher price zone today.

While the market has NOT been making intraday higher HAS been making intraday higher lows.  So, looking back at the price action from Friday post NFP, we find a pattern that we've identified in the past.  In the 30 minutes post NFP announcement, over 180k ZN contracts traded between 132-10 (the low print and consequently the bottom of the weekly bell curve) and 132-15, followed by vertical trading up to 132-27 (12-14 ticks of vertical price movement) followed by sideways-ish activity for several hours.  Then, at the London open this morning, the market distributed (moved on low volume) from 132-27 --> 133-04+.

Normally, our model says that when over 100k ZN contracts trade in a small price/time region at the outer edge of the bell curve, followed by vertical price action..followed by sideways activity (also referred to as a "P up")...we must beware an undersupply condition (a newly initiated short term trend). Today's price action seems to be indicative of this exact pattern.  So, we have a 1st P up, followed by sideways activity, followed by a supply distribution...followed by sideways activity.  The large buyer from avg price 132-14 has most likely not had an opportunity to exit his position (he needs to sell into a high volume rally because his position is so large).  This is why the 133-11 price target was the natural location to sell today.

However, at current price / time, most of the "original liquidity providers" have taken their losses and turned over their positions to fresh shorts (lots of small capitulation trades - hence the supply distribution followed by sideways activity making higher lows).  Since we "missed the boat" with regards to the original supply imbalance, the only thing to do now is wait and watch the market for signs that the large buyer is exiting his position and handing off his long position to fresh weak hands.

To be clear, the 133-11 level is no longer a line in the sand to sell (though it is still a potential liquidation zone for Friday's large buyer..and thus a level to watch closely).  I'm going to wait and see what the large trader does and follow his footprints (that means i must wait for the large trader to start selling his position BEFORE i can sell the mkt).  This makes setting up for the upcoming auctions particularly difficult for the concession trade.  So long as the new large buyer (who is levered) withholds his paper from the market, the market will have considerable difficulty moving to lower prices.

This is an unusually large degree of control for one leveraged market participant to have over the treasury market, and yet here it is.

more later...govttrader out...

Making sense of this volatility - MP has the clue

On Friday after NFP, the ZN market touched just barely 132-10 from 132-27.  The high mode for the past week is either 132-22 or 132-27 (depending on your bias).   If you were to use the higher mode (132-27), then the top of the weekly bell curve is now 133-12. 

The CFTC commitment of traders report lists ZN (10yr futures) net longs the highest since March 2008.  At the same time, net shorts in the ultra-long T-Bond (30yr futures) are the largest since July 2011.  So, the market is net long duration, and in a 7/30 steepener.  We can see this in the price action over the last week (the market has rallied and steepened).  The last time the market was this long in March 2008, there was a correction (selloff) that lasted over the following month down over 3 handles (this makes sense, as all those spec longs have to sell to somebody).  Given the upcoming 10yr and 30yr auctions this week, I expect these recent highs to be an opportunity to sell a pop, and use the auction concession setup to capture half of the bell curves volatility.  The POMO for this week includes one additional purchase (30yr bonds) which was carried over from October because of hurricane Sandy.  I'm hoping this induces a POMO related i can sell into it.

Remember, trading bell curves with market profile not only helps us determine our bullish or bearish also helps us determine where to buy and sell to minimize our risk.

govttrader out...

Friday, November 2, 2012

Trading with the weekly profile

Note to self - use the weekly mode for longer term trading.   I sort-of already knew this..but i'm writing this down in the public eye to reinforce the concept.

Ok readers, lets have some fun and look at the below picture of the last 6 days of profiles, and answer this question....what was the weekly mode (converging onto recent daily mode) going into this NFP number...and what was the high price for that time period which covers this new bell curve (remember the 7-day rule)?

If you then look at the low print after the NFP print and do some simple subtraction...i think all the Market Profile bell curve resistors will have a "son of a bitch" moment.

that is all...govttrader out...

10:38 AM update:   more recent chart...the weekly mode reigned in the market again!!!

Thursday, November 1, 2012

What do to after the month-end pop?

So, yesterday (Oct 31, month-end) the UST market (ZN) rallied to a local high at exactly 3pm, 2 ticks above the top of the locally defined bell curve (133-00). 

Readers of this blog should know that we expect this (a UST rally into month-end) to ultimately present an opportunity to change our game plan from buying dips to selling pops.  We are now always looking for ways to get short the long-end ahead of the next 30yr bond auction, and we use the ZN contract to help us gauge directionality of the market.

We won't take a position into Friday's NFP, but we do trade the price action leading up to it, and we will trade the price action after.

So, did anybody out there make a sale at 3pm yesterday?  Give me a shout out...

Govttrader out...

Wednesday, October 31, 2012

This storm will be a good test of Market Profile

The 10yr treasury future (ZN) has 3 days of "price discovery" all agreeing on a single price zone as the new weekly mode (132-20 --> 132-22) with volatility 8 ticks below the lower mode region and 10 ticks above the higher mode region.

So far, it seems to me that the market (and market profile) are telling us that we have a new medium term center of value.  If this becomes a weekly mode (highly probable), then we should have a good 18-24 ticks of range trading opportunity over the next few trading days.  Since there was little opportunity for traders to front-run the month end buying trade, it will be interesting to see what this afternoon looks like, since the US Treasury index extension is so small (0.02)  In Market Profile terms, the market looks like it is filling in a gap in the recent months price action.

There is a very good video at the cmegroup that describes how the market tends to fill-in gaps in the building of longer term profiles.  If we combine that model with our own, we can see that the move from one bell curve to another tends to occur from large buying /selling activity.

Just by eyeballing the past weeks price action, it looks like on Friday Oct 26, there was large buying activity with heavy volume between 8:30 and 10:00  AM around 132-10 that pushed us out of the prior bell curve and into this current bell curve.

My expectation is for this current bell curve to hold for the rest of the week (range trade for the next couple days), but next week the next round of auctions will start to weigh on the market.  I'm hoping there will be a pop towards the end of this week providing a good entry to setup a short for next weeks 10yr and 30yr bond auctions.

govttrader out...

Friday, October 26, 2012

Am I the only one who sees the weekly mode asserting itself?

This is the last 30 days of profiles.  I've drawn white boxes around the recent congestion zones that would make up multi-day profiles that could be combined into a single bell curve.  Note that each recent congestion zone lasts about 7 trading days.  While this is not a rule, it gives us a simple yardstick to measure the current trading region, and should help us answer the question, "what next."

Seems to me that we have probably completed the bell curve for this region (at the least, the most recent regions bell curve has been well defined).  The important question is, which way will the market break next.  Classic bell curve / market profile theory states that the market will look to fill in gaps that were left behind from moves away from previous longer period bell curves.

Since bloomberg only keeps 30 days of this data, I'll use my imagination and draw equivalent price region boxes on the 10yr note price graph going back 3 months.  We can just imagine the profiles with some common sense. 

Even with this added information, we still don't know with certainty where the next period's bell curve will setup.  The general pattern of selloff into 10yr and 30yr auctions followed by rally into month-end has not taken place yet in October.

I've talked to a number of rates strategists who think the extra-small Oct extension of 0.02 combined with the uncertainty in the Nov-6 election may mute the month end rally in UST that we have grown accustomed to.  If that is the case, then the current price region will continue to grow (range trade) until the election.  This would mean a very large move after the election as the concept of "filling the gap" will play out with even larger discrepancy between the current bell curve size and the "gap". 

Thursday, October 25, 2012

Lets start it up again

So where does the market stand now?  Value has been setup lower today in UST.  After the weekly mode @ 132-04 attracted the market one time, today's high mode @ 131-27 has pulled the market back to its center of value.  A similar situation has occurred in stocks as 1407 has acted like a center of gravity for the past 3 days.  It isn't clear yet which way the UST breakout will go, so for now, I'm planning on waiting for the next move away from the mode to determine what my next trade will be.  On the 6 month timeframe, everything other than oil has no good info there.

Just for fun

If I had indeed sold ES @ 1417 (a dream) I would cover here @ 1402.  And, to add salt to the wound, if I'd got long 10yr notes again @ 98-05 (i thought about it), i'd get flat those here too @ 98-13.

Not that I did either of those things...tisk tisk...

Trying to play the chop...just sold my 10yr notes @ 98-07

So I'm flat and looking for the next trade (i won't retire on 6 ticks, but its more than enough to pay the rent).  The 29bln 7yr auction eclipses the 5bln 10yr POMO buyback in i'm content being flat for now.  Ideally, i'll have another chance to buy a dip later today, as I am still bullish on UST and bearish on stocks.

govttrader out...

1416.75 was the high in ES....i mised by 0.25

...maybe next time??

Update - i just bought 10yr notes @ 98-01

At the bottom of the weekly bell curve because of economic data, and there is 10yr POMO in 1.5 hours...feels like a good trade to me.

govttrader out...

Back to Micro Bonds- We hit the bottom of the weekly bell curve...BTFD

With 132-04 being the weekly mode..and yesterdays high of 132-16...lets do a little simple math.  16-4 = 12.  So, 132-04 - 12 = 131-24.  Where was the low his morning?  131-23+ before the Durable Goods number.  After the Durable Goods data (strong headline number - horrible internals, as the only strength was in a Boeing Aircraft order), the market dipped below the bottom of the bell curve (a gift) and has rebounded back inside up to 131-28 at present.  I'm expecting the weekly mode at 132-04 to reign in the market at some point today, so i like buying dips.

I'm still bearish on stocks (i'm selling ES @ 1417 if we see it), but this dip today in UST is a buy to me.  I'll bet that tomorrows GDP report will show the weakness that was hidden in today's Durable Goods internals.

govttrader out..

Wednesday, October 24, 2012

One of these things is not like the other....

Does this chart really need explanation??   Who is the odd man out??

FOMC statement: can i say "called it"

Nothing else to say here.

2's, 3's, 5's and 7's at the highs after 5yr auction

Need i say anything more?  With another 29bln 7yr paper being sold tomorrow, is there any indication of selling to "setup" for the 7yr auction??   I don't think so either.  Demand for risk free UST paper is as healthy as ever.

I think, that the world is waiting for the Fed to say "we are watching and waiting, and will continue to monitor the economy and provide stimulus as we see necessary to lower unemployment and help the economy grow.  We see no changes to our current open market operations at this time...but will continue to monitor the situation and make changes and adjustments as we see fit in the coming months and years.  ok.thanks.bye"

In my personal opinion...its pretty ludicrous to expect the Fed to say much of anything else until after the election.  My only surprise is that bonds aren't doing even better than they are.  The extension for the month of October is pretty small (0.02 in UST) maybe that's why the weak UST price action.  Still, there is a week to go.

I'm not usually an elliot wave guy...but come on...

This is a 6 month chart.  Any follower of my blog would know that i tend to not even look at 6 month charts...the info is just too old.  I'll make an exception in this case for two reasons...(1)because the above chart is one time horizon larger than i normally look....and (2), because the conclusion i draw from the larger time horizon agrees with my short term view...which is lower 10yr and 30yr UST yields.

Are there any elliot wave practitioners out there who would like to comment on my interpretation of the wave count?


So its no surprise, the bond mkt has built value at slightly higher prices

With stocks stabilizing at somewhat near the recent lows, bonds are stabilizing at somewhat near their recent highs (not high enough if you ask me...but i digress).

So, the big question...will anything big happen before FOMC at 2:15?  My guess, probably not..

For those longer term view are stocks making lower highs and lower lows...and breaking threw the trend-line support with conviction after flirting with it about a week ago. 

My crystal ball foresees 10yr yields dropping like a stone in the next 7 days.  You heard it here first...

govttrader out...