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 14, 2013
Good Morning Traders,
As of this writing 5:20 AM EST, here’s what we see:
US Dollar –Up at 80.630 the US Dollar is up 463 ticks and is trading at 80.630
Energies – March Oil is up at 97.16.
Financials – The 30 year bond is up 2 ticks and is trading at 142.22.
Indices – The March S&P 500 emini ES contract is down at 1514.25 even and is down 12 ticks.
Gold – The April gold contract is trading down at 1642.00 and is down 33 ticks.
This is not a correlated market. The dollar is up+ and oil is up+ which is not 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 Sensex and Singapore indices the rest of Asia closed higher. As of this writing all of Europe is trading lower. Of course it doesn't help that Europe just reported that their economy contracted by 0.6%.
Possible challenges to traders today is the following:
- Unemployment Claims are out at 8:30 AM EST. This is major.
- FOMC Member Tarullo speaks at 10:30 AM EST. This is major.
- Natural Gas Storage is out at 10:30 AM EST. This will move the Nat Gas market.
- FOMC Member Bullard speaks at 12:50 PM. This is major.
- 30 Year Bond Auction starts at 1 PM EST. This could effect afternoon trading.
Yesterday we said our bias was to the long side but the Dow closed 36 points lower. Yet the Nasdaq and S&P both gained on the session. Ordinarily I would say that anything can happen in a volatile market and whereas that is true; I feel the need to point out something to you. The Dow was poised to go higher yesterday and initially it did. It gained about 10 points and then around 10 AM EST a story appeared that suggested that Core Retail Sales for January weren't as robust as December due to the 2% tax hike in working Americans paychecks. Now call me foolish but is there anything significant that happens in December to stimulate consumer spending and therefore Retail Sales? Anything? Could it be the Holidays? The report completely omitted the fact that the expectation was 0.1% and the report came in at 0.2% beating expectation. Now you might be asking how can this happen? Most traders don't view all the facts, they read headlines and if the headline isn't positive, they head for the exits. My point to you is that as a trader you need to be cognizant of this because uninformed headlines written by uninformed reporters can the move the markets. Today market correlation is calling for a lower open and our bias is toward the short side. Here's why. The markets are nearly correlated to the downside with the only missing ingredient being Crude. If Crude were trading lower I would say we had a completely correlated market, to the downside. Additionally 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.
Yesterday we said our bias was towards the long side because both the USD and Bonds were trading lower. However given what happened yesterday I feel compelled to provide a short video on why the Dow fell:
On the political front, no sooner had the President delivered the State of Union address when the GOP took pot shots at it. Speaker Boehner pooh poohed raising the minimum wage to $9 an hour suggesting that this will cut job growth when everyone's asking "where are the jobs?" If you ask me, I'll tell you what will cut economic growth. The Congressional lack of coming to terms on the sequester will. 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
Mitch McConnell also felt compelled to state that the address was completely political and suggested that Obama was "pandering" to his supporters. In other words it wasn't bipartisan. Let me ask you a question: what do you think would happen if Congress did in fact increase the minimum wage to $9 an hour? Research shows that if the lowest wage earner gets an increase, they'll spend it thus increasing consumer spending and then perhaps we wouldn't need to be concerned about erroneous headlines dragging the markets down.
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's crude number exceeded the 98.00 a barrel mark and went to a high of 98.06. 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 markets give us better direction. Also be aware that this afternoon at 1 PM EST the 30 Year Bond Auction starts and this has the capacity to move the markets in the afternoon. 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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Posted-In: Trading Ideas