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From the research team at PFG Best:

Recap – Week of September 28, 2009:

Once again, this past week started off with a fizzle but ended with sizzle.  Investors pretty much yawned as they waited for economic data to be released in the latter half of the week, but then the starter’s gun fired on Wednesday with the release of the Chicago PMI causing a bang on Wall Street and reverberating to the Ten Year Note market traded across the globe.  This weaker than expected report ushered in a risk aversion trade, as caution became the watchword for traders who began to realize that economic growth might not be as strong as predicted.  The risk aversion trade showed its teeth as bond markets quickly strengthened and stock markets sold off, as was mentioned would most likely happen in last week’s report.  10 Year T-Note Cash Yields tested the 3.30% break point for the first three days of the week, reacting extremely positively to a heavy day of negative data including initial claims and the ISM Index.  If you caught Eaven on Fox Business News’ pre-market open segment on October 1st, you would have heard his call for that day for interest rates to fall substantially; and conversely, this meant the 10 Year T-Note Futures would be rising.  Talk about a move up; 10 Year T-Notes moved up almost a full basis point that day, while the Cash Yield fell just over 11bps!

As usual, markets tend to overcorrect and we’ve seen a little pull back on both Futures and Cash Yields from their lows.  Both Futures and Cash Yields ended the week near the levels communicated in our research from last week: 119 and 3.23%

What to look for in the coming weeks:   Next week, investors will shift their focus from economic data (excluding initial claims on Thursday) to the beginning of 3rd Quarter corporate earnings.  Most notably, investors will be looking at Pepsi Bottling Group and Yum! Brands on October 6th, pre- and post-market.  The following day, all eyes will be on Alcoa’s earnings release pre-market on October  7th, followed by Costco and Monsanto.  In addition to corporate earnings, the US Dollar will continue to play a large role in the direction of markets over the coming weeks, although stocks’ relationship with the US Dollar will not be as correlated as it has been over the past few months, as discussed in our previous research piece.

It appears near term trends still point to 10 Year T-Note Cash Yields trending lower, with a near term bounce towards 3.30-3.33%.  We feel strength should continue, as we bounce off of current resistance near the 3.23-3.25% level and if stocks continue to retrace gains, especially due to any large downside corporate earnings surprises, look for yields to easily test the 3.11-13% level – which would be quite a drop, indeed.  Looking at 10 Year T-Note Futures, we feel the trend is still strong to the upside but more muted as we are bouncing around the 119 resistance.  We are looking for a near-term step down to 118 ½ – 118 ¾, and then back up towards 121 ½ if stocks begin another move.  Look for a test to the support levels of 3.60% and 115 ½ if 3rd quarter Corporate Earnings are stronger than expected, which we feel is very unlikely.  However, given the fact that stock markets have clung to anything remotely positive, in-line expectations may allow markets to grind higher again.  Additionally, it is our opinion that we are currently in a “lightning bolt” down trend in the stock markets towards a retesting of the S&P 500 975 level, with 1000 being a key emotional break point, followed by 990.

Going forward, look for a change in format for our weekly reports.  Instead of a long report on Fridays, we’ll be offering our thoughts on an intra-week basis: Monday, Wednesday and Friday.

Trade Update:

Short Term Trade (3 to 5 days)

We sold the Ten Year Notes at 118 6/32 and then were stopped out at 118 20/32.  We will live to trade another day on this one.

Look to sell Ten Year Notes near 119 7/32, buy stop at 119 1/2, exit near 118 22/32

Long Term Futures Trade:

Our long term futures trade entry point was hit at 118 6/32.  Maintain the buy stop at 120 2/32 and keep an eye on this report.  We may move up some of our buy stops during the week next week.

Long Term Option Trade:

Sell December 119 Calls

Buy December 122 Calls

Continue to hold this spread to expiration.  A move and close above 120 2/32 in the Ten Year note market would trigger an exit of this position, but the expectation is that the market meanders around in listless direction for the until expiration.  Keep an eye on this report, as expiration approaches we may exit this position and take profits on a move lower.

Mark Melin & Eaven Horter
PFGBEST Research Team