Friday, February 8, 2013

Pre-Market Review - 2/8/13 - ECB Torpedoes US Markets


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 8, 2013
Good Morning Traders,
As of this writing 4:45 AM EST, here’s what we see:
US Dollar –Down at 80.125 the US Dollar is down 132 ticks and is trading at 80.125.  
Energies – March Oil is up at 95.99.
Financials – The 30 year bond is up 4 ticks and is trading at 143.29.
Indices – The March S&P 500 emini ES contract is up at 1506.25 and is up 4 ticks.
Gold – The April gold contract is trading up at 1671.40 and is up 1 tick.

This is not a correlated market.  The dollar is down- and oil is up+  which is normal but the 30 year bond is trading up which does not correlate 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 slightly up does correlate with the US dollar trading lower, however Gold is flip flopping between negative and positive territory and needs to solidify direction.   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. 

The Aussie, Nikkei and Sensex closed lower but the rest of Asia closing higher.   As of this writing all of Europe is trading higher. 

  Possible challenges to traders today is the following:

-  Trade Balance is out at 8:30 AM EST.   This is major.
-  Wholesale Inventories are out at 10 AM EST.  This is not major.
-  Day 2 EU Economic Summit.  This is major.

Yesterday the Dow closed 43 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.  We are not dealing with a correlated market.  the USD is trading lower and crude is trading higher which is normal but the 30 Year Bond is trading higher and this isn't correlated with the USD.    Additionally Gold isn't committed to any direction as of yet and the indices are fractionally higher.  The reason Bonds are higher is because most people view Bonds as the safe haven.  Could this change?  Of course.   Remember anything can happen in a volatile market.

Yesterday we said our bias was towards the long side because the futures were nearly correlated with the only missing ingredient being Gold.  Gold was only 12 ticks away from it's previous close.  We also stated that two interest rate decisions would be forthcoming from Europe and that we did not expect them to raise rates.  They didn't.  However Mario Draghi, President of the ECB gave a press conference and had some somber remarks regarding the exchange rate of the Euro.   This was enough to send events in motion.  The Euro dropped dramatically and the USD skyrocketed.  The USD went from 79.600 to well over the 80 mark and is still in the 80 mark range as I write this.  Apparently Mr. Draghi needs to learn as Ben Bernanke has learned that any remark he makes regardless of how innocent the remark is, can move the markets.   What he said in essence was "the euro's exchange rate isn't a policy target, we're concerned about price stability"  in other words inflation.  Apparently this was misconstrued as we don't care what the value of the euro is and set events in motion.  Ironically enough last month I warned my subscribers to be on the lookout for comments coming out of the ECB press conference, but last month nothing happened.  They just reported that they weren't going to raise rates.  Mr. Draghi needs to develop more political tact when he speaks, apparently he hasn't learned this yet.  When the value of the USD goes as high as it did yesterday, in such a short period of time, it will drive everything else lower, as it did.

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 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.  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.

Traders, 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:

Here's a video on what happened yesterday after the ECB:

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 97.20 a barrel mark but fell dramatically after the ECB conference.   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 all 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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