wmeubank@ocp.kcmo.com
FISHBACK MANAGEMENT & RESEARCH
P.O. Box 23798, Lexington, Kentucky
(October 16, 1997) FINANCIAL INSTRUMENTS: DECEMBER BOND FUTURES–Our bond market model is bullish. The yield curve is positive and the trends in both long-term and short- term interest rates are bullish. Sentiment is neutral, neither excessively bullish nor bearish. Action in interest-sensitive stocks is positive. And the action in gold and gold stocks is also bullish (at least bullish for bonds), as the downtrend remains in place. There have been a couple of recent attempts at a trend reversal in gold, but they have, thus far, all been turned back. It bears close watching to see if gold can rally, as it is still a very good indicator of future inflation.
There is one rather ominous indicator out there that is actually altering our investment strategy. The position that commercial traders have taken is one of the largest bearish positions ever. In other words, those traders that are usually right about market direction are bearish. To compensate for this rather bearish indicator, we are assuming a very high volatility of 10.50% in our probability and expected return calculations. That is the highest level that volatility reached during the past year and a half and assumes that a substantial adverse move is much more likely than the market expects. In other words, the market is assuming that a large negative move is a slight possibility. By using a higher volatility assumption, we are saying that a large negative move is not totally remote.
RECOMMENDATION–Our indicators are bullish, but we want to use extra caution. Sell the December 112 put (settle, 14/64) and buy the December 100 put (settle, 1/64) for a minimum credit of 16/64 or better. If you can't enter the trade by Tuesday's close, cancel your order and wait until further instructions.
Added to the WWW 10-17-97
Last updated on 10-17-97
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com