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 25, 2013
Good Morning Traders,
As of this writing 5:15 AM EST, here’s what we see:
US Dollar –Down at 81.465 the US Dollar is down 120 ticks and is trading at 81.465.
Energies – April Oil is up at 93.64.
Financials – The 30 year bond is up 3 ticks and is trading at 144.03.
Indices – The March S&P 500 emini ES contract is up at 1517.25 and is up 11 ticks.
Gold – The April gold contract is trading up at 1590.20 even and is up 19 ticks.
This is a nearly correlated market to the upside. The dollar is down- and oil is up+ which is normal and the 30 year bond is trading fractionally higher, we anticipate that the Bonds will degradate in value as the morning wears on . 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:
- No Major economic news for the US markets.
- Lack of major economic news.
On Friday we said our bias was toward the long side because the markets were completely correlated to the upside. The net result being that the Dow closed 120 points higher. Today the markets are nearly correlated to the upside. The missing ingredient being the Bonds. If the Bonds were trading lower I would say we had a completely correlated market to the upside. As such our bias is to the upside. Here's why. The markets are nearly correlated to the long side with only Bonds trading fractionally higher. We expect that Bonds will trade lower as the morning wears on. Additionally Asia closed higher and Europe is currently trading higher. We do not have any major economic news, therefore we don't have anything to drag the markets lower. Could this change? Of course. Remember anything can happen in a volatile market.
The great thing about market correlation is that it gives you an insight as to what the market fundamentals are. Now you might ask yourself "why is that important"? It's important because markets generally tend to lean towards those fundamentals regardless of what news is being reported. Are there exceptions? Of course. Look what happened on Wednesday, the markets were poised to go higher but didn't. Mid-morning after this newsletter was published, the markets changed direction abruptly. But as a trader if you see that it changed abruptly, take the appropriate action. Remember that as traders, your number one rule is to preserve your trading capital because without it there is no trading.
Well the weekend came and went but both sides stood their ground and stuck to their guns regarding the sequester issue. In his weekly address, President Obama called on the GOP in Congress for a little compromise. In response to his weekly address, Senator John Hoeven said the President doesn't want to work with the GOP and basically stood by his guns. Senator Hoeven does not sound like a right wing nut. In fact, he sounds like an adult in the room. He admonished Obama for not signing the Keystone XL pipeline bill but at the same time criticized the Democrats for increased regulation. Has the GOP forgotten the diaster we had a few short years ago in the Gulf of Mexico? That happened because of reduced regulation. But then again members of the GOP aren't going to have to face the families of those who lost their lives due to reduced regulations. This President will have to do so and I think he's concerned. So GOP; give him credit where it's due; at least he's concerned about the welfare of the our citizens. Can we say the same about Corporate America? In any case, the Senate is set to consider bills that would avoid the upcoming cuts on Tuesday or Wednesday. We'll have to see what these bills contain.
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 4 days 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
It is painfully aware to me that Congress has no intention of doing anything on this issue. The GOP wants sequestration to happen. They seem to believe that their number one goal is to starve the government. What they fail to realize is that we the people are the government. They don't seem to be mindful of the fact that many innocent government employees (FBI, Law Enforcement, Meat Inspectors, etc.) will be effected by the sequester and will wind up on furlough and hence unemployed. Unemployment will increase and this no doubt will spill over to the private sector. Does anyone know any employer who wouldn't jump at the chance to layoff? I don't. Think about this for a moment. It's illegal for any food retailer to put out meat that isn't inspected. If a particular type of meat isn't inspected, they can only put meat that is and has been inspected. What do you think will happen to the prices of meat that they can legally put out? You guessed it. The price of that meat will go up. This is one simple example. What about milk, eggs and any other staple we take for granted? They need to understand that what they are doing is liken to the person stuck in a dark cave with a stick of dynamite in one hand and a match in the other; and then they light the match to see their way forward. Currently Congress isn't even in session right now and I suspect that they are willing to throw caution to the wind and see what happens. I would also suggest that this will change come April 15th. Why April 15th? Because it's tax day? No. The bill that Obama just recently signed extends the debt ceiling into May but if Congress can't get a balanced budget by April 15th, they will forgo their pay. This I have to see. Of course Speaker Boehner has no problem blaming the President but fails to mention that legislation comes out of the House of Representatives and currently there is no bill on the floor to vote on.
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.
Oftentimes we listen to traders talk about problems and issues they are confronted with. One issue that keeps re-surfacing deals with trader psychology. Now I can deal with a market issue, I can deal with a trading issue but I'm not a trading psychologist. A good friend of Market Tea Leaves, Mr. Norman Hallett has been a leader in this field for over 20 years. I've followed his work for over 8 years and I highly recommend it. You can view Norman 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. Yesterday crude went to a low of 92.44. 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 March 1st.
- 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 when the market gives us better direction. 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.
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