wmeubank@ocp.kcmo.com
FISHBACK MANAGEMENT & RESEARCH
P.O. Box 23798, Lexington, Kentucky
(October 2, 1997) FINANCIAL INSTRUMENTS: SEPTEMBER BOND FUTURES–Our bond market model is still bullish. The trends in both long-term and short-term interest rates are all positive. Plus, the yield curve is positively sloped. Two items, however, justify a special note. First, gold prices have been moving upward very sharply this week. In fact, the XAU, an index of gold an silver mining stocks, nearly climbed above the level it was a year ago. That's quite an accomplishment, since only two weeks ago, the index was more than 25% below its year-ago level. As we said last week, we'll have to keep a close eye on this situation. The other item is the action in interest-sensitive stocks. We look at two very broad-based indices traced by Dow Jones. One index is a financial index, the other is a utility index. Both indices are at all-time highs! For the bond market to “roll over” and collapse right here would be unprecedented, given this powerful strength exhibited by interest- sensitive stocks.
RECOMMENDATION–Sell the November 114 put (settle, 16/64) and buy the November 112 put (settle, 4/64) for a minimum credit of 18/64 or better. If you can't enter the trade by Tuesday's close, cancel your order and wait until further instructions. This entry price is pretty far from the current market price. Based on current bond option volatilities, it appears that December bonds will have to fall about 20/64 in order for this spread to be filled.
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