How to Successfully Trade the Bond Futures (Part III)
And Tips for Position Traders
By Al Martin

10-29-07)Trades for the week of Oct. 22- 26, 2007

In Monday’s trade, we went S-2 HGZ 3.52 C 3.51, SS-2 KCZ 1.2240 C 1.2240, L-4 USZ 113.08 S 113.12, L-4 USZ 113.06 S 113.10, L-4 USZ 113.03 S 113.07.

In Tuesday’s trade, we went L-4 WZ 8.41 S 8.4350, S-5 OJF 1.4730 C 1.453

In Wednesday’s trade, we went SS-4 USZ 113.11 C 113.07, L-4 USZ 113.13 S 113.17, SS-4 CZ 3.59 C 3.5650.

In Thursday’s trade, we went L-4 USZ 113.26 S 113.30.

We saw late last week, as we had predicted previously, that the continuation of buying on the dips was the correct strategy in the bonds. We saw, finally Friday, the bonds did come down to trade within the new lower zone. Indeed, the USU contract traded down to an intra-day low of 113.06, exiting the regular session at 113.14 despite bond-friendly news flows, i.e., substantially weaker than expected housing data, weaker than expected durable goods data, and weaker than expected consumer confidence data.

Simply put, the bonds, as we had warned, are trading rich. And the bonds also, as we speak every day on our daily trade line, are very much tied at the hip to the equities. Equities rally, the bonds come down, and we see that trade developing now almost tick for tick. In other words, I could tell on Friday on the line – I didn’t look at the bond quotes all day long. I just looked at the S&P quotes, and could tell where the bond quotes were almost to the tick. That’s how close the relationship has become.

However, the bonds, basis Friday’s close at par 13.14, are very cheap. And we believe that the trade in the bonds is still scalping them from the long side on dips. Yet we think that at Friday’s close, they are fair market value, relative to news flows. Economic news flows continue to be bond market friendly. Obviously, a Fed rate cut next week would also be bond market friendly, particularly if it is interpreted the right way, in the light that the Fed is doing something it doesn’t want to do because there’s another shoe to drop out there. But the long and short of it is you want to continue scalping the bonds from the long side. Furthermore, at current levels, they’re cheap.

For position traders, we had recommended shorting the December coffee contract (KCZ) several weeks ago at 140. You see that the back of the coffee market has been broken in here, under increasing supply and diminishing demand. In fact, the coffee traded to a new low for the entire cycle move, under 1.21 Friday.

We think that the coffee shill is now going to be completely unwound and that the likely target for the December contract is 1.14. Therefore, we recommend that those short the coffee should continue to hold, looking for another 6 or 7 cents out of the December contract.

Furthermore, we recommended shorting the Jan. orange juice contract (OJF) at 1.50 or better. You see that contract also broke late-week to close at 1.3880. We notice that it was nothing but wanton bullish shillism from the commodity funds that had goosed the juice, and juice was overbought. And indeed we would expect the juice will be coming back down to the 1.30 area.

To blow our own horn, remember we had been recommending consistently to trade the Dec. cocoa, CCZ, from the long side. Indeed we ourselves were doing so. You saw the cocoa, after initially trading up around 1900, had fallen back mid-week to retest recent lows in the 1830's. However, what do we see Friday but a sharp rally of almost $100, with the contract exiting the week at 1911, up $84 in Friday’s session. We had consistently advised that cocoa was the only fungible on the board that did have a bullish supply/demand story, and we continue to recommend trading the cocoa from the long side on dips.