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.
February 15, 2013
Good Morning Traders,
As of this writing 6:20 AM EST, here’s what we see:
US Dollar –Up at 80.555 the US Dollar is up 17 ticks and is trading at 80.555
Energies – March Oil is down at 96.77.
Financials – The 30 year bond is up 7 ticks and is trading at 143.22.
Indices – The March S&P 500 emini ES contract is down at 1516.25 and is down 9 ticks.
Gold – The April gold contract is trading down at 1626.70 and is down 88 ticks.
This is a correlated market, unfortunately it is correlated to the downside. The dollar is up+ and oil is down- which is normal and the 30 year bond is trading up which correlates with the US dollar trading up. 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 and the US dollar is trading higher. Gold is trading down which correlates with the US dollar trading higher. 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 exception of the Hang Seng and Shanghai indices the rest of Asia closed lower. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
- Empire State Manufacturing Index is out at 8:30 AM EST. This is major.
- TIC Long Term Purchases is out at 9 AM EST. This is not considered major.
- Capacity Utilization Rate is out at 9:15 AM EST. This is not considered major.
- Industrial Production M/M is out at 9:15 AM EST. This is not considered major.
- Preliminary UOM Consumer Sentiment is out at 9:55 AM. This is major.
- Preliminary UOM Inflation Expectations is out at 9:55 AM EST. This is major.
Yesterday we said our bias was toward the short side with the net result being that the Dow closed 10 points lower. We also said that the markets weren't correlated and that our bias was to the short side. Today we have the added volatility of options expiration which adds another layer of eratic behavior in the markets. Market correlation is calling for a lower open and our bias is toward the short side. Here's why. The markets are (as of this writing) correlated to the downside. The USD is trading higher which is conducive to a bearish stance. As of this writing Europe is trading lower and has been moving in and out of positive territory all morning. Could this change? Of course. Remember anything can happen in a volatile market.
Here's a short video on why the Dow fell on Wednesday:
For some time now we've been saying that next round of challenge for traders will be the sequester cuts scheduled to start on March 1st. March 1st is two weeks away from today and yet no one is raising this as any issue relative to the economy or markets in general. It seems to me that everyone is betting on the concept that at the very last moment Congress will come together and get something done. Just so you're aware of what will be cut if Congress does not come to terms on this issue:
- Small Business
- FDA Food Inspections
- Research and Development
- FBI and law enforcement
No sooner had President Obama delivered the State of the Union address when the GOP decided to attack it. What did they attack? Not Gun Control, too many people want it. Not Women's Rights, too many women out there. No they decided to attack the one thing they could get away with: raising the minimum wage to $9 an hour. Senator Marco Rubio (in between his sips of water) mentioned it. By the way just so you know the Senator claimed to live in the same Middle Class neighborhood that he grew up but is selling his home for $675,000 in Florida; doesn't sound too Middle Class to me. Speaker Boehner pooh poohed it stating that "this is not the thing to do when everyone is wondering where the jobs are." Paul Ryan called it "inflationary". Michelle Bachman had to throw her 2 cents in and Mitch McConnell called the speech "pandering". Let's examine for a moment what would happen if the minimum wage went to $9 an hour and explore how it could be done. The GOP claims that this would produce an unfair hardship on Small Business and that the owners of Small Business would suffer as a result. Now I'm an advocate of Small Business and if this were to ocur the small business owner could do two things:
- Raise their price of goods and services sold. In my state the minimum wage is $7.50. If it went up to $9 an hour as suggested this would mean an increase of $60 per week. If the business employed 10 people that would mean an increase of $600 per week or about $30,000 over the course of a year. I would suggest that a 2-3 percent increase in the price for goods or services would more than cover the cost of the increase. Additionally research shows that if the lowest wage earner gets an increase in pay they will spend it. So what would happen if more people had more money? They'll spend it and they'll it on the goods and services of the small business who just raised their prices slightly to cover this cost and in effect if that small business runs a solid enterprise they'll find that their business volume will increase. The same thing happened during the Clinton years. Who wasn't doing well in the 1990's?
- Most Small Business owners that I know are high net worth individuals. It is also well known that high net worth individuals give to charity. In fact most donate anywhere from 5-10% annually. Now they don't do this for charity. They do it because they get a tax deduction for doing so. Now what if they cut the donations in half and used the other half to augment the higher cost of labor? It will probably help them get over the hump until the higher prices kicked in.
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.
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 but our bias is towards the long 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.
As I write this the crude markets are starting to trade lower and the US Dollar is advancing. 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. Yesterday crude went to a high of 97.71. So it would seem that at the present time crude's support is at 92.00 with resistance at 98.50 a barrel. This could change. All we need do is look at what happened last fall when crude was trading over $100.00 a barrel. We'll have to monitor and see. Remember that crude is the only commodity that is reflected immediately at the gas pump.
- Sequester spending cuts to commence around early March
- Debt Ceiling in the May 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, consider doing so after 10 AM EST when the economic news is released and the markets give us better direction. 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.
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