Market Tea Leaves - Sitzkrieg Rally?
Pre-Market Global Review - 1/11/13 -Sitzkreig 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 11, 2013
Good Morning Traders,
As of this writing 4:20 AM EST, here’s what we see:
US Dollar –Up at 79.890 The US Dollar is up 73 ticks and is trading at 70.890.
Energies – February Oil is down at 93.79.
Financials – The 30 year bond is up 4 ticks and is trading at 144.31.
Indices – The March S&P 500 emini ES contract is down at 1466.50 and is down 2 ticks.
Gold – The February gold contract is trading down at 1670.20 and is down 78 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 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 down with no sense of direction. Gold is trading down which correlates with the US dollar trading up. 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 and Japan's Nikkei the rest of Asia closed lower. 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:
- Trade Balance is out at 8:30 AM EST. This is major.
- Import Prices are out at 8:30 AM EST. This is not major.
- Federal Balance Budget is out at 2 PM EST. This could move afternoon trading.
Yesterday we said that we were dealing with a correlated market. The net result? The Dow closed 80 points higher and the S&P hit a five year high. Today the markets are correlated to the downside. Could it be that the Smart Money wants to take money the table? Possibly. The Smart Money likes to sell into rallies because they know that what goes will invariably come down. As an update to yesterday's news regarding Europe's minimum bid rate; both the Bank of England and the ECB held their rate with no increase.
Many pundits today are calling for a market retreat and some have said a retreat of up to 42 percent. They point to fundamentals and suggest that because the US economy isn't fundamentally sound, that we will see a major retreat. On this point I'm not so certain. I'll be the first to admit that ignoring rules of market correlation isn't sound. However I look back at the summer of 2011 when "the earth was falling under our feet" and see that we survived this and the market actually grew in this period. Apparently these pundits are reading much into the upcoming debt ceiling and are predicting doom and gloom. True, the debt ceiling will have an impact but so did the recent fiscal crisis and guess what? We're still here. The markets will do what they do meaning they will rise, they will fall. This is normal. Do I think the debt ceiling will have an impact? Of course. But I also think that the markets will serve as a catalyst to get something resolved. You'll notice that when the markets retreated during the fiscal crisis it served as a wake up call to Congress: get something done. I suspect that the debt ceiling will do the same. During the height of debt ceiling talks we will probably see the Bond prices increasing as Bonds are considered a safe haven if the market falters. This ties with market correlation. What happens when the financials increase? The market goes down.
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. NJ Governor Christie may be partly placated as Congress did provide 9 Billion dollars worth of flood relief aid to those affected by Hurricane Sandy but must now wait until next week for the balance of 51 Billion dollars of relief funds. I have no doubt that if Congress stalls on this Governor Christie will not be so silent. Christie's popularity has never been higher in New Jersey. Here, we view him as the Tony Soprano of politics.
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. Our understanding is that although Jacob Lew has been around the DC scene for some time, he is not too tied into Wall Street as is Secretary Geithner. It will be intersting to see how this plays out. 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 lower open. Could this change? Of course. We could have a less than stellar Trade Balance number or the Smart Money can decide to take money off the table. Additionally the Fed Budget could affect afternoon trading. 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 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 hit an intra-day low of 92.61 a barrel and held. Could it go lower? Of course. As of this writing, it is currently trading at 93.51 a barrel. 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 95.00 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 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 8:30 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.