Market Tea Leaves - AIG Withdraws Suit
Pre-Market Global Review - 1/10/13 -AIG Withdraws Suit
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 10, 2013
Good Morning Traders,
As of this writing 4:35 AM EST, here’s what we see:
US Dollar –Down at 80.675 The US Dollar is down 2 ticks and is trading at 80.675.
Energies – February Oil is up at 93.77.
Financials – The 30 year bond is down 13 ticks and is trading at 145.03.
Indices – The March S&P 500 emini ES contract is up at 1459.25 and is up 14 ticks.
Gold – The February gold contract is trading up at 1661.10 and is up 56 ticks.
Finally we have a correlated market. The dollar is down- and oil is up+ which is normal and the 30 year bond is trading down 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 unchanged with no sense of direction. Gold is trading up which correlates with the US dollar trading down. 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 India's Sensex the rest of Asia closed higher. As of this writing, Europe is mixed as the Paris CAC is slightly lower is trading lower but the rest of Europe is higher.
Possible challenges to traders today is the following:
- Unemployment Claims are out at 8:30 AM EST. This is major.
- Wholesale Inventories are out at 10 AM EST. This is not major.
- Natural Gas Storage is out at 10:30 AM EST. Whereas not considered major, it will move the Nat Gas market.
- 30 Year Bond Auction starts at 1 PM EST.
- FOMC Member George Speaks at 1:10 PM EST.
- FOMC Member Bullard Speaks at 2 PM EST.
Yesterday the Dow closed 62 points higher despite the fact that we didn't have a correlated market. It seems as the Smart Money wanted to capitalize on the Alcoa earnings from Tuesday evening. This plus the fact that the market had been down the previous two days drove the markets higher. Last night most of Asia closed higher and currently Europe is mixed. One point on Europe is that today both the Bank of England and the ECB will reveal the minimum bid rate which is the equivalent to our Federal Funds Rate. This could provide direction to European trading which in turn could potentially impact the US market.
Yesterday we revealed that the former CEO of AIG Hank Greenberg was to meet with the AIG Board to discuss the prospect of suing the United States government for the bailout of AIG in 2008-2009. We are happy to report that the Board of Directors of AIG has wisely elected NOT to pursue the proposed lawsuit and has informed Hank Greenberg not to include AIG in any proposed suit. When this news came out yesterday Democratic politicians across the country were outraged especially given the fact that AIG has created TV commercials thanking the US government (and of course, taxpayers) for bailing them out!! It wouldn't surprise me if Hank Greenberg decides to sue AIG instead. Perhaps you'll understand why 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.
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. McConnell has also claimed that the GOP will use whatever political capital they have to combat spending. I'm wondering what political capital he's referring to.
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. We are now hearing that as opposed to the two months Secretary Geithner originally stated; the US will start to run out of funds in mid-February as opposed to the March time frame. This would mean that the debt ceiling issues could start much earlier than originally planned. As an update on this issue; Secretary Geithner is to replaced by Jacob Lew who has been around DC politics for over two decades. He will certainly need all the help he can get in the upcoming debt ceiling battle. It would seem to me that this year we will 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 higher open. Could this change? Of course. We could have a less than stellar Employment report or Europe could raise their minimum bid rate. 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 trading higher and the US Dollar is declining. 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 hit an intra-day low of 92.68 a barrel and held. That would suggest to me that $90 a barrel is now the support threshold for crude. 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.
- Sequester spending cuts to commence around early March
- Debt Ceiling also around the early March time frame.
Crude oil is trading higher and the US Dollar is declining. 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 after the economic news is released and 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.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.