Thursday, February 7, 2013

Pre-Market Review - 2/7/13 - GOP Harpoons Prez & PO


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 7, 2013
Good Morning Traders,
As of this writing 5:45 AM EST, here’s what we see:
US Dollar –Down at 79.645 The US Dollar is down 122 ticks and is trading at 79.645.  
Energies – March Oil is up at 96.94.
Financials – The 30 year bond is down 8 ticks and is trading at 143.09.
Indices – The March S&P 500 emini ES contract is up at 1509.25 and is up 9 ticks.
Gold – The April gold contract is trading down at 1677.60 and is down 12 ticks.

This is a nearly correlated market.  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 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 up and the US dollar is trading lower.  Gold is trading down which does not correlate 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. 

  All of Asia closing lower.   As of this writing all of Europe is trading higher. 

  Possible challenges to traders today is the following:

-  Unemployment Claims are out at 8:30 AM EST.   This is major.
-  Preliminary Non-Farm productivity is out at 8:30 AM EST.  This is not major.
-  Preliminary Unit Labor Costs are out at 8:30 AM EST.  This is not major.
-  FOMC Member Stein speaks at 9:30 AM EST.  This is not major.
-  Natural Gas Storage is out at 10:30 AM EST.  This will move the Nat Gas market.
-  Consumer Credit is out at 3 PM EST.  This is major.

Yesterday the Dow closed 8 points after spending most of the day in negative territory.  It was only in the final hour of trading that the Dow rebounded to close slightly higher.  The Nasdaq on the other hand was not so fortunate.  It closed down 4 points.  It only goes to show you that anything can happen in a volatile market.  Today market correlation is calling for a lower open but our bias is toward the long side.   Here's why.  All of Asia closed lower but as of this writing all of Europe is trading higher.  Europe will have 2 interest rate announcements later this morning: one from the ECB and the other from Great Britain.  Neither of which are expected to raise rates.  If this is correct then the European Indices will continue to trade higher and I expect that to follow thru to the US markets.  Additionally the US markets are nearly correlated with teh missing ingredient being Gold.  However Gold has been trading higher all morning and (as of this writing) is only 12 ticks away from its closing price.  12 ticks on Gold is not much to speak of.  Could this change?  Of course.   Remember anything can happen in a volatile market.

Yesterday there was no major economic news to speak of, so the markets were left to their own devices.  We said our bias was towards the short side because the USD and Bonds were stronger.  Today we have a different situation.  The USD is weaker, as are the Bonds and Gold is only 12 ticks away from its previous close.  The great thing about market correlation is that it gives you a clue as to what to look forward to.  

On the political front it appears as though Speaker Boehner has decided to attack the President in terms of sequester spending scheduled to start in the March time frame.  This came as a result of a speech the President made on Tuesday requesting that Congress go easy on spending cuts.  The President also suggested elimination of some tax deductions as a way and means of spending reduction.   Apparently this was enough for the Speaker who went on the offensive to say that he's not opposed to sequester spending cuts if no other alternative can be found.  So this is the new and imporoved 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.  Case-in-point: they're now going after the Postal Service to cut Saturday delivery of First Class Mail.  Come August we will no longer receive mail delivery on Saturday.  Now you may view that as a good thing but think about it, you can't include a Saturday when it comes to paying a bill.  The reason why the Post Office has lost money in recent years?  Most folks would say it's the Internet and eCommerce.  No.  The Postal Service is the only government agency that has to fund 75 years worth of retirement benefits in a 10 year window.  This law was passed in 2006 with a GOP majority in Congress and a GOP President.  Without this requirement the Postal Service would have posted a profit, yes a profit of 1.5 Billion Dollars.  Because of this Saturday business it is estimated that 20-25,000 postal workers will lose their jobs.  Postal workers are not entitled to receive Social Security, I know.  My father was a postal worker for 46 years.  I know this first hand.  

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 lower open and our bias is towards the short 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.
Here's a video on how a trader can use market correlation to short Crude:


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's crude number hit the 97.00 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 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 careful this afternoon when teh Consumer Credit numbers are released as this could move the markets in either 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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