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.
March 1, 2013
Good Morning Traders,
As of this writing 5:25 AM EST, here’s what we see:
US Dollar –Up at 82.250 the US Dollar is up 247 ticks and is trading at 82.250.
Energies – April Oil is down at 91.09.
Financials – The 30 year bond is up ticks and is trading at 145.26.
Indices – The March S&P 500 emini ES contract is down at 1510.00 even and is down 13 ticks.
Gold – The April gold contract is trading down at 1570.00 even and is down 81 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 higher. 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 and the US dollar is trading higher which is correlated. Gold is trading lower 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 Shanghai and the Hang Seng, the rest of Asia closed higher. As of this writing all of Europe is trading lower.
Possible challenges to traders today is the following:
- Core PCE Price Index is out at 8:30 AM EST. This is major.
- Personal Spending is out at 8:30 AM EST. This is major
- Personal Income is out at 8:30 AM EST. This is major.
- Final Manufacturing PMI is out at 9 AM EST. This is major.
- Revised UOM Consumer Sentiment is out at 9:55 AM EST. This is not considered major.
- Revised UOM Inflation Expectation is out at 9:55 AM EST. This is not considered major.
- ISM Manufacturing PMI is out at 10 AM EST. This is major.
- ISM Manufacturing Prices is out at 10 AM EST. This is not major.
- Construction Spending is out at 10 AM EST. This is major.
- Vehicle Sales - All Day. This is major.
Yesterday we said our bias was to the short side because the underlying fundamentals were uncorrelated and have been all week. You cannot ignore fundamentals as sooner or later it will come home to roost. The net result was the Dow fell 21 points and I don't think we're done. The market dropped after the news came out that two Senate bills to avert the sequester failed. This happened late in the trading day. This shouldn't surprise readers of this newsletter as we've been saying all week that two things can happen: a.) the underlying market fundamentals will correct or b.) the market will go lower. As I write this the market is correlated but it is correlated to the downside. As such our bias is to the downside. Here's why. Besides the market correlated to the downside and the sequester kicking in today, we have 11 economic news reports that will make trading trading erratic. There is no Ben Bernanke speaking today. I perceive that the selling that started late yesterday afternoon will continue. 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 yesterday, the markets were poised to go lower 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 March 1st is now upon us and two Senate bills that were supposed to avert the sequester failed to achieve a 60 vote majority in the Senate. The GOP bill came in at 38 yeahs and the Democrat Bill came in at 51, neither of which is enough. Now it appears as though it's blame game tine DC. Already both parties are blaming the other. The Democrats are saying that President Obama would have vetoed the GOP bill even if is passed the Senate. The GOP is saying the Democrats will blame them if the United States falls into recession. Speaker Boehner has already stated "the President got his tax hikes." What he fails to mention however is that the Democrats want to employ a balanced approach; which by the way 76% of Americans want that approach. The GOP approach will pose a shock to an already fragile economy. It seemed to me that thru out this issue everyone was betting on the concept that at the very last moment Congress would come together and get something done. When it didn't happen, the market sold off. President Obama has stated that he will meet with party leaders from both sides over the weekend, so another political drama will unfold. 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
As stated previously:
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. As an update to this the Senate will be voting on a bill to balance the sequester spending cuts with revenue increases but the GOP will hear none of it. Speaker Boehner publicly stated "they've already had their revenue increase."
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 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 went to a low of 91.57 and as I write is trading below 91.00 a barrel. I expect this selling to continue and we will monitor crude prices carefully. It seems that at the present time crude's support is at 90.00 with resistance at 96.00 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 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 consider doing so after 10 AM when the markets give 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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