Market Tea Leaves - ECB Torpedoes US Markets
This newsletter provides free market direction trading insights that are derived from our seasoned and unique, inter-market analysis. We hope that this information will provide both the novice and seasoned trader with valuable assistance. Our approach is to harvest clues from the Market's “tea leaves” as to what the market is doing or is likely to do.
Indices – The March S&P 500 emini ES contract is up at 1506.25 and is up 4 ticks.
The Aussie, Nikkei and Sensex closed lower but the rest of Asia closing higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
Yesterday we said our bias was towards the long side because the futures were nearly correlated with the only missing ingredient being Gold. Gold was only 12 ticks away from it's previous close. We also stated that two interest rate decisions would be forthcoming from Europe and that we did not expect them to raise rates. They didn't. However Mario Draghi, President of the ECB gave a press conference and had some somber remarks regarding the exchange rate of the Euro. This was enough to send events in motion. The Euro dropped dramatically and the USD skyrocketed. The USD went from 79.600 to well over the 80 mark and is still in the 80 mark range as I write this. Apparently Mr. Draghi needs to learn as Ben Bernanke has learned that any remark he makes regardless of how innocent the remark is, can move the markets. What he said in essence was "the euro's exchange rate isn't a policy target, we're concerned about price stability" in other words inflation. Apparently this was misconstrued as we don't care what the value of the euro is and set events in motion. Ironically enough last month I warned my subscribers to be on the lookout for comments coming out of the ECB press conference, but last month nothing happened. They just reported that they weren't going to raise rates. Mr. Draghi needs to develop more political tact when he speaks, apparently he hasn't learned this yet. When the value of the USD goes as high as it did yesterday, in such a short period of time, it will drive everything else lower, as it did.
On the political front it appears as though Speaker Boehner has decided to attack the President in terms of sequester spending scheduled to start in the March time frame. This came as a result of a speech the President made on Tuesday requesting that Congress go easy on spending cuts. The President also suggested elimination of some tax deductions as a way and means of spending reduction. Apparently this was enough for the Speaker who went on the offensive to say that he's not opposed to sequester spending cuts if no other alternative can be found. So this is the new and improved GOP in action. They won't outwardly hold the country hostage as they did in 2011; they'll set up events such that it works out that way. So come March 1st they'll just innocently sit back and say "oh well we have to cut, it's the law you know." I've been wondering why they're so eager to extend the debt ceiling. They're waiting for a tsunami of events to occur such that there will be no other alternative. If you're wondering what this has to do with markets; I would say to you everything. Look at what happened during the recent fiscal cliff crisis. If you're wondering why we haven't had correlated markets since the election, look no further. The markets do not like uncertainty when it comes to fiscal issues and anything that reeks of uncertainty is not viewed in a positive light. The Smart Money is loving it because thus far they made any issues about March 1st or sequester spending cuts. Will the markets survive? of course. But it also seems to me that the GOP knows all too well that Congress will only act when it has to. In other words, they know that DC drags it's feet when it comes to spending cuts and they've setup events such that it has to happen. Case-in-point: they're now going after the Postal Service to cut Saturday delivery of First Class Mail. Come August we will no longer receive mail delivery on Saturday. Now you may view that as a good thing but think about it, you can't include a Saturday when it comes to paying a bill. The reason why the Post Office has lost money in recent years? Most folks would say it's the Internet and eCommerce. No. The Postal Service is the only government agency that has to fund 75 years worth of retirement benefits in a 10 year window. This law was passed in 2006 with a GOP majority in Congress and a GOP President. Without this requirement the Postal Service would have posted a profit, yes a profit of 1.5 Billion Dollars. Because of this Saturday business it is estimated that 20-25,000 postal workers will lose their jobs. Postal workers are not entitled to receive Social Security, I know. My father was a postal worker for 46 years. I know this first hand.
As readers are probably aware I don't trade equities. 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.
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 and our bias is towards the short side. 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:
Please note the video is about a half hour in length and we plan on producing more in the near future. Also note that in the near future we will have other videos where we will interview various trading leaders.
- Sequester spending cuts to commence around early March
- Debt Ceiling in the May time frame.
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