Tuesday, March 12, 2013

Pre-Market Global Review - 3/12/13 - The Battle of the Budgets

Good Morning Traders,

As of this writing 4:45 AM EST, here’s what we see:

US Dollar – Up at 83.055 the US Dollar is up 225 ticks and is trading at 83.055.
Energies – April Oil is down at 91.73.
Financials – The 30 year bond is up 6 ticks and is trading at 141.04. 

Indices – The March S&P 500 emini ES contract is down at 1554.00 and is down 8 ticks.
Gold – The April gold contract is trading up at 1581.40 and is up 35 ticks from its close.

Quick Note: Unless otherwise shown the above contract months are now June.   

Initial Conclusion: This is a nearly correlated market and 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 up which is not correlated with the US dollar trading higher.   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 Singapore, the rest of Asia closed lower.  As of this writing all of Europe is trading lower.  

Possible challenges to traders today is the following

  1. No Major Economic News for the US markets. 
  2.  Lack of Economic News.
  3. Federal Budget Balance is out at 2 PM EST.  This is major.
Yesterday we said our bias was to downside with the outlier being Gold.  The USD cracked the 83 level on Friday and is still trading there now.  Despite this fact the Dow gained 50 points yesterday.  Today the markets are nearly correlated with the missing ingredient being Gold. If Gold were trading lower I would say we had a correlated market to the downside.  As such our bias is to the downside.  Here's why.  The markets (with the exception of Gold) is correlated to the downside.  Asia closed lower and Europe is currently trading lower.  There's no major economic news to propel the markets higher.  Could this be the day that the Smart Money decides to take capital off the table?  We'll have to monitor and see.  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 at what happened on yesterday, the markets initially opened lower but then mid-morning decided to go higher.  For those of you who like to employ a gap up or gap down strategy at the open, this is a boon.  But as a trader if you see that it changed abruptly, you can 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. 

They say that the definition of insanity to do the same thing over and over and expect a different result.  GOP Representative Paul Ryan has decided (once again) to declare open warfare on the Affordable Care Act aka Obamacare.  Not only he is doing that with his new budget but he's also looking to torpedo Medicare, Medicaid and any other "entitlement" program.  He seeks to do this by cutting government spending by 4.6 Trillion dollars in 10 years without increasing taxes.  In contrast, the Democrats are proposing doing this by budget cuts and increasing taxes on high net worth individuals.  Paul Ryan's budget would turn Medicare into a voucher program.

So despite all the pandering, all the dinners, all the lunches and meetings in the White House; the GOP is sticking to the party line and not compromising one iota.  Didn't these guys lose an election in November?  When is the GOP going to wake up and realize that Ayn Rand is dead?  And that her philosophies are a throwback to the 1920's when the government preached a hands-off mentality?  When is the GOP going to realize that we the people don't think these programs are "entitlements", they are in fact a return-on-premium as you , I and any other American who ever worked for a living paid into this?  An entitlement is a gift, it's not a gift when we pay into it our entire working lives.
While we're on the subject, the folks in DC are treating this issue as if GDP is a finite number, not subject to change.  In the Reagan years total GDP was 11-12 Trillion dollars; if we had that now it would be considered a major depression.  GDP is not finite; in theory there is no limit to what it could be. These people need to realize this and borrow a page from Bill Clinton's playbook.  When he first came to office he stated "alot of the problems we have today can be resolved by a growing, thriving economy."  Enough said.   

For the time being nothing will change as it will take some time before these cuts are felt thru out the economy.    Remember that we still have the debt ceiling issue hanging over our heads and this won't happen until the May time frame.  Another aspect of this that we are seeing is no follow thru when it comes to fundamentals.  What I mean by this is when the markets are correlated to either the long or short side; they may take the opposite direction during the trading day but by the end of the day saner minds rule and they return to fundamentals.  They aren't doing that now.  So the markets could initially be correlated to the downside and then close higher by the end of the day, completely ignoring all fundamentals.  The Smart Money doesn't have any issue doing this but the danger to a trader is that if the Smart Money finally wakes up (and sooner or later they will) you as a trader could be stuck on the wrong side of the market.  And that will be painful.   
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.  It will be interesting to see what happens come April 15th as this is the day when either a budget is approved or Congress goes without pay.  The GOP is adamant about sticking to their guns and will not relent.  The question is what will the Democrats do? 
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 dropped to a low of 90.89 a barrel and held.   We'll have to monitor and see if crude either goes lower or holds at the present level.   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. 

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 10 AM when the markets give us better direction.  Also be mindful that the Federal Budget number will be out at 2 PM EST as this can make afternoon trading erratic.  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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