Market Tea Leaves - Financials Report this Week
Pre-Market Global Review - 1/14/13 -Financials Report this Week
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 clues from the Market's “tea leaves” as to what the market is doing or is likely to do.
January 14, 2013
Good Morning Traders,
As of this writing 4:31 AM EST, here’s what we see:
US Dollar –Down at 79.585 The US Dollar is down 26 ticks and is trading at 79.585.
Energies – February Oil is up at 93.92.
Financials – The 30 year bond is up 15 ticks and is trading at 145.24.
Indices – The March S&P 500 emini ES contract is up at 1469.25 and is up 8 ticks.
Gold – The February gold contract is trading up at 1669.70 and is up 91 ticks.
This is a mainly correlated market. The missing ingredient is bonds. Bonds should be trading lower as is the US dollar. The dollar is down- and oil is up+ which is normal but 30 year bond is trading up 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 with the US dollar trading lower. 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.
Although Japan's Nikkei was closed for a bank holiday, the rest of Asia closed higher. As of this writing, Europe is trading higher.
Possible challenges to traders today is the following:
- No major economic news to effect the US markets.
- Lack of economic news.
On Friday the Dow closed 17 points higher although the trading day didn't start out that way. The Dow actually dropped about 30 points before regaining strength. Today we are calling for a higher open even though the bonds are trading higher. I suspect the reason for this is traders are hedging their bets and bonds are higher "just in case". I suspect that as the morning wears on bonds bonds will go lower as the futures rise. Europe is trading higher and Asia closed higher. There is no major economic news to drive the markets lower but as always we'll have to monitor and see. Remember anything can happen in a volatile market.
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.
Another point that the doom and gloom folks point to increased taxation. They say that because tax rates will increase for the high net worth folks they will sell their assets. Well let's think about this for a minute. If you're a high net person and you're used to a certain style of living but your tax rate is going up to 39.6 percent, what will you do? In all likelihood you'll probably increase your trading activity to augment the higher tax rate. Consider this as food for thought, the last time the US had a 39.6 percent tax rate was during the Clinton Administration. What happen with the markets during the Clinton Years? Enough said.
As readers are probably aware I don't trade equities. However this week the Financials will be reporting. Goldman Sacks (GS) and JP Morgan (JPM) will report on Wednesday, January 16th. Obviously we'll have to see what they report but the significance here is that both these stocks report good earnings 80 percent of the time. This will probably serve as a bellwether for the markets going forward into the quarter. Do we know what they'll report? Of course not, but putting the odds in your favor when it comes to trading is always ideal. 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 there's not much to report on. It would appear as though this is the calm before the storm. I would expect that as this quarter wears on we'll much more activity in this area as either the debt ceiling is going to be raised or spending will be cut or both. As always we'll have to monitor and see. I expect the infighting will occur in mid-February as the government will start to run out of money and hence the battle commences.
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 interesting 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 technically market correlation is calling for a lower open, however our bias is towards the upside. 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 an add-on benefit, Carl Weiss has also created a 5 minute video on HFT and Algo Trading; it can be viewed at:
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. On Friday Crude hit an intra-day high of 94.70 a barrel. In terms of resistance it would seem at the present time that is the 95.00 a barrel area with support at 90.00. 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 when 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.