T-Bond trading comment (November 21, 2007)

Bulls are on steroids with what continues to happen in the credit market. In fact the market seems to be panicking a bit (as seen in Europe where the players in the Covered Bond market decided to completly stop market making activities so as to stop the blood shed since bids are non-existent). Another days brings another trolley of bad news and the market just keeps going up in sympathy with the problems despite the fact that it should maybe relax a bit.

We arrived this morning, with the market almost up a buck overnight on rumours that ACA and SCA might be downgraded and that ACA was even considering Chapter 11. If these two bond insurers are effectively downgraded, this has major implications for the bond market. In addition to that, we also had more rumours coming out of the UK on funding problems for several banks as well as massive capital injections... To top this off, we were just in front of a very long week-end (even if the market is open Friday morning) and with the kind of newsflow we have right now, the only news we can have until next Monday will be bond supportive... Oh yes I just forgot, equities got hammered, again, we have now erased all of 2007 profits and I think that we might be headed for much lower prices even if there is a nice support at 1411 in the S&P500 futures to be tested first.

Today's trading was well supported at yesterday's resistance of 116-14. In fact, since 3:00 AM in the morning we bounced on it for a total of 4 times. The upside was somewhere near the 117 line, but the market seems to be completely driven by the credit news and when there is no news, the market simply stays put... In the past month and a "quarter", the market has now rallied almost 7 dollars and this is after a previous rally of around 6 dollars over the summer. How much higher can the market go ? Obviously, with the actual context, it can go much higher but the January 122 calls (exp. Dec 21st) looks attractive at 11/64. There is 29 days left before expiration and we are still 5 bucks away from the strike... So this means the market needs to rally by 12 dollars in total since mid-October before the short sell get in hot waters. Not impossible, but unlikely...

This week's Friday is known has the Black Friday and is the most important shopping day in the whole year. The market will be eager to see the retailers numbers as fast as possible since they usually give a good pointer as to where the Q4 GDP will come out, how the employment will be affected as well as retail sales. Estimates are pointing for a strong number...