Market Tea Leaves - Earnings Season Starts

Pre-Market Global Review - 1/7/13 - Earnings Season Starts

The purpose of this newsletter is to hopefully provide the novice trader with some insight as to market direction. The idea is to provide some clues or “tea leaves” as to what the market is doing or is likely to do.

January 7, 2013

Good Morning Traders,
As of this writing 4:35 AM EST, here’s what we see:

US Dollar –Up at 80.695 The US Dollar is up 85 ticks and is trading at 80.695.
Energies – February Oil is down at 92.70.
Financials – The 30 year bond is up 6 ticks and is trading at 144.22.
Indices – The March S&P 500 emini ES contract is down at 1455.75 and is 8 ticks lower.
Gold – The February gold contract is trading up at 1654.60 and is up 56 ticks.

Conclusion
This is not a correlated market. The dollar is up+ and oil is down- which is normal and the 30 year bond is trading up which is correlated. The Financials should always correlate with the US dollar such that if the dollar is lower then bonds should follow and vice versa. The indices are down which correlates with the US dollar trading up. However Gold is trading up despite the US dollar trading up (which is not correlated). So it would appear as though Gold is the culprit. I tend to believe that Gold has an inverse relationship with the US Dollar as when the US Dollar is down, Gold tends to rise in value and vice-versa. Think of it as a seesaw, when one is up the other should be down. I point this out to you to make you aware that when we don't have a correlated market, it means something is wrong. As traders you need to be aware of this and proceed with your eyes wide open.

With the except of the Shanghai Index, Asia closed lower. As of this writing, all of Europe is trading lower.

Possible challenges to traders today is the following:

- No economic news for the US markets.
- Lack of economic news.

On Friday the Dow closed 44 points higher due to a better than expected Jobs report. However it did not start out that way. The Dow actually opened lower but very quickly rebounded due in no small part to the better than expected Jobs report (150,000 expected, 155,000 actual). The market then spent the rest of day between positive and negative territory. For the week the Dow rose nearly 500 points due to the fiscal cliff resolution.

Today Earnings Season starts with Alcoa Aluminum reporting after hours. Some pundits have suggested that this will be a lackluster earnings season with companies barely reporting good earnings. I would take a different view and I'll explain why. The auto industry has reported robust sales for 2012, in fact in their opinion this has been the best year since 2007 (pre 2008 market meltdown). Automobiles still use many base raw materials (steel, aluminum, glass, rubber, etc.) that are still produced by American firms. I would say that Alcoa will probably report good earnings as engines today are mainly many made with aluminum. Of course, as always we'll have to monitor and see. While we're on this discussion, let's define what is meant by a good earnings report. A company must exceed their prior quarter's earnings per share and must provide excellent forward guidance. Any falloff between earning per share or forward guidance will not bode well for the company's shares. This is one of the reasons I don't trade equities but prefer futures. There is no earnings reports with futures and we don't have to be concerned about lawsuits, scandals, malfeasance, etc.

On the political front it seems as though the GOP is starting to restate its pledge to hold down spending as Senate Minority Leader McConnell has stated that he is through talking about taxes but wants to focus on spending. This is ironic because President Obama wants to start shutting down tax loopholes for large corporations. It will be interesting to see how this plays out as Speaker Boehner has stated that he will not negoitiate directly with the President in the future.

The passed Fiscal Cliff bill does not address spending and this was a sore point for the GOP. Sequestration will start two months from now as Secretary Geithner has taken "extreme measures" to buy two months to address spending cuts. It would seem to me that 2013 will be this type of year where we have political dogfights in DC over spending. Ironically enough at around the same time that we have sequestration issues we will also have issues over the debt ceiling. The debt ceiling is far more lethal than the recent fiscal cliff as this can effect the rating of US government debt. This will be liken to Summer, 2011 whereby Standard & Poors dropped the triple A rating of US government debt to double A. The debt ceiling issue must be addressed as it can effect foreign investment in the United States and the US government will in effect run out of money to pay obligations. It's similar to getting an increase on your credit card limit.
Anytime the market isn't correlated it's giving you a clue that something isn't right and you should proceed with caution.. Today market correlation is calling for a lower open. Could this change? Of course. In a volatile market anything can happen. We'll have to monitor and see. For awhile now we've promised a video on how a trader can use Market Correlation in tandem with their daily trading. A good friend of Market Tea Leaves: Carl Weiss of Sceeto and I produced a video on December 22nd that shows this. Here it is:

http://youtu.be/Ysx-nOgAtkI

Please note the video is about a half hour in length and we plan on producing more in the near future.

As I write this the crude markets are trading lower with the US dollar trading higher. This is normal. Think of it this way. If the stock market is trading lower, it's safe to assume that the crude market will follow suit and vice versa. Crude trades with the expectation that business activity is expanding. The barometer of which is the equities or stock market. If you view both the crude and index futures side by side you will notice this. On Friday Crude hit an intra-day low of 91.52 a barrel and held. That would suggest to me that $90 a barrel is now the support threshold for crude. Crude has maintained this level for 3 consecutive trading days. In terms of resistance it would seem at the present time that is the 94.00 a barrel area. We'll have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump.

Future Challenges:

- Earnings Season starts today
- Sequester spending cuts to commence around early March
- Debt Ceiling also around the early March time frame.

Crude oil is trading lower and the US Dollar is advancing. This is normal. Crude typically makes 3 major moves (long or short) during the course of any trading day: around 7 AM EST, 9 AM EST and 2 PM EST when the crude market closes. If crude makes major moves around those time frames, then this would suggest normal trending, if not it would suggest that something is not quite right. If you feel compelled to trade today then consider doing it after 10 AM EST when the market gives us direction. But as always watch and monitor your order flow as anything can happen in this market. This is why monitoring order flow in today's market is crucial. We as traders are faced with numerous challenges that we didn't have a few short years ago. High Frequency Trading is one of them. I'm not an advocate of scalping however in a market as volatile as this scalping is an alternative to trend trading.

Remember that without knowledge of order flow we as traders are risking our hard earned capital and the Smart Money will have no issue taking it from us. Regardless of whatever platform you use for trading purposes you need to make sure it's monitoring order flow. Sceeto does an excellent job at this. To fully capitalize on this newsletter it is important that the reader understand how the various market correlate. More on this in subsequent blogs.