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 20, 2013
Good Morning Traders,
As of this writing 4:25 AM EST, here’s what we see:
US Dollar –Down at 80.425 the US Dollar is down 120 ticks and is trading at 80.425
Energies – April Oil is up at 97.25.
Financials – The 30 year bond is down 5 ticks and is trading at 142.29.
Indices – The March S&P 500 emini ES contract is up at 1529.15 and is up 6 ticks.
Gold – The April gold contract is trading up at 1605.00 and is up 6 ticks.
Finally a correlated market to the upside. The dollar is down- and oil is up+ which is normal and the 30 year bond is trading down which correlates with the US dollar trading lower. 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 and the US dollar is trading lower. Gold is trading higher 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.
All of Asia closed higher. As of this writing all of Europe is trading higher.
Possible challenges to traders today is the following:
- Building Permits are out at 8:30 AM EST. This is major.
- PPI is out at 8:30 AM EST. This is major.
- Core PPI is out at 8:30 AM EST. This is major.
- Housing Starts are out at 8:30 AM EST. This is major.
- FOMC Minutes are out at 2 PM EST. This is major.
Yesterday we said our bias was toward the long side and despite the fact that the markets weren't correlated. The net result? The Dow closed 54 points higher and hit a fresh 5 year high. Today market correlation is calling for a higher open and our bias is toward the long side. Here's why. Ordinarily my bias on a day like today would be towards the short side because usually the Smart Money likes to take money off the table after hitting a fresh 5 year high. However the Dow closed higher yesterday which lead to Asia closing higher and Europe is currently trading higher. Additionally the markets are completely to the upside which these days is rare. Hence my bias is towards the long side. Now we have major reports coming out this morning and that can change everything and additionally we have the FOMC Meeting minutes this afternoon and that can lead to erratic afternoon trading, but we'll have to see. Could this change? Of course. Remember anything can happen in a volatile market.
This afternoon we have the release of the FOMC Meeting Minutes. Some pundits and analysts will attempt to decipher those minutes to seek clues as to when the Fed is going to raise interest rates or more notably the FFR (Federal Funds Rate) aka the Overnight Rate. This is the rate of interest that the Federal Reserve charges banks for loans. The banks in turn charge we the consumers a rate that is far higher than what the Fed charges a bank. Has anyone tried to get a loan these days? Then you know what I'm talking about. In any case, this could lead to irrational behavior in the markets this afternoon. Sometimes it's treated as a mini FOMC meeting, even though it is not. Be mindful of this if you're trading in the afternoon and best bet; wait until after the report is released and then decide.
For some time now we've been saying that next round of challenge for traders will be the sequester cuts scheduled to start on March 1st. March 1st is less than two weeks away and yet no one is raising this as any issue relative to the economy or markets in general. It seems to me that everyone is betting on the concept that at the very last moment Congress will come together and get something done. 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
Yesterday Simpson-Bowles came back into the foray by caliming that there was a way for the US Government save trillions of dollars over a ten year period. Problem is, that they weren't too specific on how this could be accomplished. Additionally the GOP came out and formally claimed that they are not in favor of any additional revenues increase aka tax hikes to the high net wealth folks. Speaker of the House Boehner said "they just got an increase last month and now they're coming back for more." What the GOP doesn't seem to understand is that if this issue isn't resolved, more people will lose their jobs. What do you think is going to happen to government employees who work in the departments that are slated to get their budgets cut? They will get laid off. This will increase the Unemployment Rate in this country and will set off a chain reaction that will hit the private sector. Want proof? What about consulting firms that offer services to the government? The last time this happened in 2011, many of those firms were on the cusp of laying people off; they received a reprieve after an agreement was made and held off doing so. They will not be that generous this time around if some agreement isn't made. On another note Senator Marco Rubio (aka water boy) said that an Immigration Bill was DOA (dead on arrival). Wait, I thought he wanted an Immigration Bill? Doesn't he come from a family of immigrants? Struggling hard to make in the United States? I guess not.
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 higher open and 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 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. Yesterday crude went to a high of 97.25. 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 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, consider doing so after 10 AM EST when the economic news is released and the markets give us better direction. Additionally be mindful of the FOMC Meeting minutes to be released at 2 PM EST. 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.
To View previous articles of Market Tea Leaves:
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