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Market Tea Leaves - FOMC Minutes Quells Rally


Pre-Market Global Review - 1/4/13 - FOMC Meeting Minutes Quells Rally





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 4, 2013

Good Morning Traders,
As of this writing 4:45 AM EST, here’s what we see:

US Dollar –Up at 80.890 The US Dollar is up 375 ticks and is trading at 80.890.
Energies – February Oil is down at 92.10.
Financials – The 30 year bond is down 23 ticks and is trading at 144.00 even.
Indices – The March S&P 500 emini ES contract is up at 1454.25 and is 3 ticks higher.
Gold – The February gold contract is trading down at 1640.10 and is down 39 ticks.

This is not a correlated market. The dollar is up+ and oil is down- which is normal and the 30 year bond is trading down which is not 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 up which does not correlate with the US dollar trading up. Gold is trading down and the US dollar trading up (which is correlated). So it would appear as though Bonds and the Indices are the culprits. 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 Hang Seng Index, Asia closed higher. As of this writing, all of Europe is trading lower.

Possible challenges to traders today is the following:

- Non Farm Employment Change is out at 8:30 AM EST. This is major.
- Unemployment Rate is out at 8:30 AM EST. This is major.
- Average Hourly Earnings is out at 8:30 AM EST. This is not considered major.
- ISM Non Manufacturing PMI is out at 10 AM EST. This is major.
- Factory Orders are out at 10 AM EST. This is not considered major.
- Natural Gas Storage is out at 10:30 AM EST. This will move the Nat Gas market.
- Crude Inventories are out at 11 AM EST. This will move the Crude market.
- FOMC member Yellen speaks at 3:30 PM EST. This is major.

Yesterday we stated that we weren't dealing with a correlated market. The net result being that the Dow closed 22 points lower. This was due in no small part to the release of the FOMC Meeting Minutes. We also stated yesterday that this was major news which would put the active trader on alert and be mindful of this report. It seems as though the Fed is running out of bullets so to speak to keep the economy moving forward. I would challenge this by stating that the FED has already begun QE3 (even though they aren't calling it Quantitative Easing). I would also state that if this economy has a slowdown in 2013, they will become very creative in terms of seeking a solution. Remember that the Fed has a dual mandate: keep inflation under control and lower the unemployment rate. They also stated at their last meeting that they will not raise the FFR (Federal Funds Rate, also called the Overnight Rate) until either inflation picks up or the Unemployment Rate falls to 6.5%. They aren't specifying a particular timetable as they've done previously but they do not expect this to change until late 2014 at the earliest. Famed economist Nouriel Roubini isn't too hopeful on the US economy as he thinks the European contagion can spread to the United States. I would challenge that by stating that in 2008-2009 our recession left the rest of the world untouched. European and Asian economies grew in this timeframe and quite frankly I'm not convinced that the US economy is running on all cyclinders. In other words the US can grow further.

Yesterday the 113th Congress was sworn in and appears as though John Boehner was re-elected even if he had to vote for himself due to lack of support from the GOP. In a way this is good because if a more radical member of the GOP had gotten elected; it would be more of a do-nothing Congress than it already is. I don't think much will change with this Congress as the Speaker has stated that he will not negotiate directly with President Obama. This will make it more difficult to get things done. The good news is that whereas the GOP still holds the majority in the House, more Democrats have been elected and more women will serve in Congress than ever before.

On a personal note. Governor Christie of New Jersey did not have any kind comments for the current majority of the House as New York and New Jersey were promised funds to help rebuild after Hurricane Sandy. I live in New Jersey. I've seen firsthand the devastation this storm brought to this area. I'm grateful that my property wasn't severely affected but I know many people who cannot say that. It is 67 days since this storm hit and there are no Federal Funds to speak of. The issue that Christie has is a vote was to be taken on Tuesday night at the same time the Fiscal Cliff Bill was passed but Mr. Boehner decided it was too much for conservatives to deal with and decided to scrap the vote. Mind you that in any other natural disaster funds were approved in a matter of days, not months. Case-in-point Hurricane Katrina relief was passed within ten days, not over two months. As an update to this we now understand that funds will be approved piecemeal as opposed to a single bill. Flood damage relief in the amount of 9 billion dollars will be approved next week but the balance of the 60 billion dollars for New York and New Jersey won't be approved until late January.

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. The economic news could be excellent and change everything. Today we have the Jobs Numbers and this is always key. I personally don't trade on this day as history has taught me that the markets have no sense of normalcy. 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.

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. Yesterday Crude hit an intra-day low of 92.50 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 where its resistance level is, that is yet to be determined but 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 next Monday, January 7th
- 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 11 AM EST when the economic news is released and the market gives us direction. I'm stating 11 AM EST because the crude inventory number will be released at that time. 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 preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Economics Markets Trading Ideas


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