July 24, 2019
Easily, one of the single most difficult aspects of futures trading, particularly at tops, is that you DO have to be able to Sell a market when absolutely EVERYTHING you hear and read suggests exactly the opposite.
And in my opinion, this IS definitively where the interest rate markets are today. The media is so overwhelmingly convinced that rates are going lower that the futures markets are now reflecting a 100% certainty that the Fed will lower rates 1/4% next week.
It’s irrelevant, but I absolutely don’t think they need to…But, even if they do lower rates, I am just as 100% convinced that this would be their last cut for years to come…With stocks making new highs, with the economy doing the same, with unemployment the lowest it has been in 50 years…and with Congress throwing in the towel with their debt ceiling deal yesterday (more government spending with no budget cuts can ONLY mean more government borrowing), I might be dead wrong, but I honestly cannot imagine any scenario in which rates, from here, will be doing anything but moving higher…
Therefore, with the 2020 Eurodollar contracts have already built in further rate cuts that I believe will NOT come, at current levels, I think both Treasury Bonds and Eurodollars are major shorts…and recommend doing so by Selling Futures or Buying Puts.
And here is the essence…Here are the pure mathematics of what I am trying to show you….
And here is the put I currently like in March 2020 Eurodollars…
Here is the put option I like here in Bonds…
I mean, really…Another aspect of trading is understanding that after market perceptions have reached “100% certainty”, more often than not, it can sometimes mean that there is nowhere else to go---but in the opposite direction… At least that is what I have seen more times than I can count…The markets are NOT efficient…They do get it wrong. They do go too far in one direction (enormously so at times), and they do make fairly abrupt reversals…and yes, right in the face of “100% certainty.”
I keep reminding myself that Small Speculators are now more long the various interest rate futures markets than they have ever been…when, in some cases, they have NEVER been long…going all the way back to the very first interest rate futures contract.
And finally…Here’s a question…You supply the answer…
Just suppose this…Say we’ve gotten 2-3 months down the road…and have seen something like 2-3 months of 200,000-250,000 new jobs having been created each month…With maybe the Dow a few 1000 points higher…And Retail Sales STILL banging higher. And GDP a solid 2.5%...? Do you really think all this talk that “The economy NEEDS lower rates!” will still be out there in the media? Or will there be a different take? Like, “Holy cow. The economy is getting hot!” And if this IS the case, where do you think the two contracts shown here will then be?
Obviously, if this scenario does not come to pass, if the economy actually is “weak” or “weakening”, it is quite possible I will be proven wrong and Eurodollars WILL still be at 98.25…or even higher.
Give me a call if you want to talk about any of this.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Treasury Bonds, Eurodollars.