Market Tea Leaves - Dow at 14,000, Can It Hold?
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.
Indices – The March S&P 500 emini ES contract is up at 1507.75 and is up 4 ticks.
With the exception of the Hang Seng Index the rest of Asia closing lower. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
On Friday we said our bias was towards the long side with the net result being that the Dow closed 149 points higher and hit the 14,000 mark for the first time in over 5 years. It only goes to show you that anything can happen in a volatile market. Today market correlation is calling for a lower open and our bias is toward the short side. Here's why. Historically speaking whenever the market (any market) hits a new high not seen in quite some time, The Smart Money will take money off the table. This is liken to what happened in calendar year 2000 when the Nasdaq hit a high of over 5,000. The Smart Money (aka institutionals) immediately took money off the table. Am I saying that the Smart Money will do this today? I don't know if they'll do this today but the odds are and history says that at some point they will. If not today then probably sometime this week. With the exception of the Hang Seng (which closed lower), the rest of Asia closed higher. As of this writing all of Europe is trading lower. The missing ingredients are the bonds and indices. If the bonds were trading higher and the indices were trading lower I would say this is completely correlated market. Bottom line, this is an uncorrelated market. Could this change? Of course. Remember anything can happen in a volatile market.
On Friday the Jobs Report came in at less than expected and the unemployment rate actually rose one tenth of 1 percent. The official number now stands at 7.9 percent. So you may be asking how can that be? How could the market rise that much even though the Jobs numbers weren't that great? The answer is market correlation. We said our bias was towards the long side because the markets were nearly correlated and the only thing missing was a higher crude number. Crude was down fractionally Friday morning, so our bias was to the long side. Today we have a different situation. The indices are only up fractionally and I would never underestimate the power of the USD to move markets. The great thing about market correlation is that it gives you a clue as to what to look forward to. Today we have no major economic news to speak of and therefore have nothing to drive the markets higher.
On the political front it appears as though the Democratic controlled Senate has decided to pass the debt ceiling extension that the GOP dominated House of Representatives passed last week. It now has to go to the President for passage. The caveat here is that Congress must approve a blueprint for the budget by April 15th or they will forfeit their pay. This I have to see. Whereas the debt ceiling talks have been put off until May 19th, sequester spending cuts will occur in the early March time frame, as scheduled. It will be interesting to see how DC will react to this. In all likelihood they'll probably put it off until the debt ceiling issue comes into play but we'll have to see. At some point this month, this will be revisited as Congress must come to some decision prior to March 1st. March 1st marks the day that automatic spending cuts come into play and the DC folks have to decide what they're going to do about it. 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. Will the markets survive? of course. But I suspect that the GOP wants to extend for the very purpose of keeping uncertainty and therefore fear alive. They know the markets are fickle and the longer the issue remains alive the more uncertainty will be created.
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 and our bias is towards the short side. Could this change? Of course. We could have a Factory Orders report that could in fact drive the markets higher or lower. 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.
Here's a short video on how a trader can use market correlation:
- Sequester spending cuts to commence around early March
- Debt Ceiling also around the early March (could be May if POTUS signs) time frame.
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