Thursday, January 31, 2013

Pre-Market Global Review - 1/31/13 - GDP and FOMC - Lethal Weapons?


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 31, 2013
Good Morning Traders,
As of this writing 4:40 AM EST, here’s what we see:
US Dollar –Down at 79.290 The US Dollar is down 36 ticks and is trading at 79.290.  
Energies – March Oil is down at 97.70.
Financials – The 30 year bond is up 15 ticks and is trading at 143.17.
Indices – The March S&P 500 emini ES contract is down at 1494.00 even and is down 4 ticks.
Gold – The February gold contract is trading down at 1675.60 and is down 43 ticks.
This is not a correlated market.  The dollar is down- and oil is down-  which is not normal and the 30 year bond is trading up which is not correlated with the US dollar trading down.  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 fractionally with the US dollar trading lower.  Gold is trading down which again isn't correlated with the US dollar trading lower.   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 the Nikkei and Shanghai indices the rest of Asia closing lower.   As of this writing all of Europe is trading lower. 

  Possible challenges to traders today is the following:

-  Challenger Gray Job Cuts are out at 7:30 AM EST.  This is major. 
-  Unemployment Claims are out at 8:30 AM EST.  This is major.
-  Core PCE Price Index is out at 8:30 AM EST.  This is not major.
-  Employment Cost Index is out at 8:30 AM EST.  This is not major.
-  Personal Spending is out at 8:30 AM EST.  This is not major.
-  Personal Income is out at 8:30 AM EST.  This is not major.
-  Chicago PMI is out at 9:45 AM EST.  This is major.
-  Natural Gas Storage is out at 10:30 AM EST.  This will move the Nat Gas market.

Yesterday we advised not trading due to FOMC Day with the net result being that the Dow closed 44 points lower.  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.  With the exception of the Nikkei and Shanghai (which closed fractionally higher), the rest of Asia closed much lower.  As of this writing all of Europe is trading much lower.  Apparently they didn't like the news out of the US either.  In terms of correlation the USD is down but the Bonds are trading higher.  This means that traders are seeking a safe haven in bonds.  Gold is trading lower even though the USD is lower.  The indices are trading lower even though the USD is lower.  Bottom line, this is an uncorrelated market.   Could this change?  Of course.   Remember anything can happen in a volatile market.

Yesterday between the GDP which dropped one tenth of one percent and the comments coming out of the FOMC statement, it was enough to drive the markets lower.  The FOMC Statement made comments about inclement weather in the 4th quarter.  What they are referring to is Hurricane Sandy which drove many businesses in teh Northeast to shutdown for weeks.  I know this firsthand because I live in New Jersey and I can tell you for fact that we saw gas lines for the first time in over 30 years here.  Power was out for weeks and many businesses could not open due to lack of power.  Groceries were hard to come by because many supermarkets were without power, couldn't open and had to dispose of food that had gone bad.  Understand something, the Northeast demographically speaking is the largest concentration of people and businesses in the United States.  It doesn't exactly help that the folks in DC dragged their feet when it came to providing aid.  And you thought the folks in DC were so smart?  This is something we discussed during the height of the Fiscal Cliff Crisis when our own Republican Governor Christie attacked the GOP in Congress for not providing aid fast enough.  Sooner or later it all comes to roost and sure enough it has.  As expected the FOMC did not increase the Federal Funds Rate for reasons that we discussed yesterday.  At least they have this thing between their ears called a brain.  And apparently they intend to use it. 

On the political front it appears as though its "all quiet on the western front" as nothing new has occurred.  Our understanding is that the GOP has gone to a retreat in North Carolina this weekend to discuss what their stance will be going forward.  It would seem to me that moderate Republicans (aka the adults in the room) have realized that this Tea Party thing isn't working out too well.  The American people clearly don't want a government that is held hostage.  Last week the GOP dominated House of Representatives passed a measure to extend the debt ceiling for 90 days.  It now has to go to the Democratic controlled Senate and the President for approval.  Between them I don't think it has a chance for passage but the Smart Money is loving it.  They just got a 3 month reprieve from this issue but don't worry, once they realize the measure won't pass that will change.  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.  Look at what happened to Facebook last night.  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 however our bias is towards the short side.  Could this change?  Of course.  We could have an Employment Claims number 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 one on market correlation between the USD/Crude:


As I write this the crude markets are trading lower and the US Dollar is declining.  This is not 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 exceeded the 98.00 a barrel mark.   So it would seem that at the present time crude's support is at 92.00 with resistance at 98.00 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. 

Future Challenges:

 - Sequester spending cuts to commence around early March
 - Debt Ceiling also around the early March time frame.

Crude oil is trading lower 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.  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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