Friday, October 19, 2007

Time to look for longs or sell puts

I wouldn't get overly bearish. The 10year is near 4.41% currently and probably won't go much lower, especially if the FOMC keeps rates the same. Next week I'm expecting some choppy action until the release of the FOMC's decision. Sunday/Monday we may finally see some weakness in China's market which could leave us with another gap down for the US market open from overseas spillage, but if the 10yr goes to 4.3% I'm looking for long stock trades only. A week and a half ago I predicted the yield on the 10yr would go down to at least 4.5%, and we are now past that. The bond market is pricing in at least a 25 bp cut with the current yields and if yields go any lower I'm looking to go short ZF because I highly doubt another 50 bp cut from the FED, given that there was some actually talk of a rate hike. If the FOMC raised rates 25bp, I would go massively short bonds. I don't know what a good position in the stock market would be with that scenario, but given that the market has already sold off in anticipation of a cut, I would expect the market to rally. As it stands now the financial sector is to be considered oversold but may go lower with more potential market panic to come in the next 2 weeks.


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