Tuesday, February 26, 2013

Pre-Market Global Review - Sequester Sets In


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 26, 2013

Good Morning Traders,

As of this writing 5:05 AM EST, here’s what we see:
US Dollar –Down at 81.750 the US Dollar is down 27 ticks and is trading at 81.750. 
Energies – April Oil is down at 92.45.
Financials – The 30 year bond is up 11 ticks and is trading at 145.19.
Indices – The March S&P 500 emini ES contract is up at 1492.25 and is up 20 ticks.
Gold – The April gold contract is trading up at 1597.60 even and is up 110 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 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 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 lower.  As of this writing all of Europe is trading lower.   

  Possible challenges to traders today is the following:

-  S&P Home Price Index is out at 9 AM EST.  This is major.
-  HPI is out at 9 AM EST.  This is major
-  CB Consumer Confidence is out at 10 AM EST.  This is major.
-  Chairman Bernanke Testifies at 10 AM EST.  This is major.
-  New Home Sales are out at 10 AM EST.  This is major.
-  Richmond Manufacturing Index is out at 10 AM EST.  This is not considered major.

Yesterday we said our bias was toward the long side because the markets were completely correlated to the upside.  Initially the markets opened higher to the tune of nearly 100 points.  However after 10 AM EST the markets started to move down and stayed down most of the day, closing 216 points lower.  What happened?  The USD started to climb at 10 AM and Gold moved lower.  When the US dollar starts to climb all other markets will fall.  This same phenomena occurred two weeks ago when the ECB held their news conference.  I suspect the Smart Money decided to take money off the table given that the Dow had climbed 120 points on Friday and the sequester fear finally kicked in.  Today we are not dealing with a correlated market.  As such our bias is to the short side.  Here's why.  We are not completely certain that the Smart Money is done taking money off the table.  All of Asia closed lower and currently all of Europe is trading lower.  Additionally we have the added impact of Ben Bernanke testifying before Congress.  This alone can making trading erratic.  Could this change?  Of course.   Remember anything can happen in a volatile market.
I've created a video on what happened yesterday.  It can be viewed here:

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. 

It appears as though the the Sequester spending cuts are finally starting to sink into the markets.  That shouldn't be any surprise to the followers of this newsletter as we've been saying this for months.  The Smart Money has finally come around to the fact that unemployment will rise, people will have less capital to spend and we may well see inflation start to creep into the economy.  If inflation isn't checked and this issue isn't resolved, we could see interest rates increase.  Now one might say  "that's ok because I haven't seen an increase on my bank interest or yields on my bonds."  I agree that we're due for an increase on bank interest but not at the expense of the US economy.  Understand that if that did happen, businesses will be strapped to overcome short term capital required to meet payroll, pay vendors, etc.  What will they do to overcome this?  Lay people off.  No matter which way you look at, no one is immune to the problem and it will have an effect on an already fragile economy.

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 3 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:

- Education
- 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.   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 yesterday "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.

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:


Additionally Norman puts out a weekly 4 minute drill for traders that's worth looking at.  If you as a trader are having issues trading, I would strongly recommend viewing his program and the 4 minute drill for traders.  Here's one worthy of note:

As I write this the crude markets are trading lower and the US Dollar is starting to advance.  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 91.77 but did not stay there long.   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 March 1st.
 - Debt Ceiling in the May time frame.
 - European Contraction

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 Ben Bernanke is done testifying before Congress today.  This should be in the afternoon.  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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