Monday, March 18, 2013

Pre-Market Global Review - Meet the New GOP - Same as the Old

Good Morning Traders,
As of this writing 4:40 AM EST, here’s what we see:
US DollarUp at 82.880 the US Dollar is up 414 ticks and is trading at 82.880.  
Energies – May Oil is down at 92.81.
Financials – The June 30 year bond is up 37 ticks and is trading at 143.02
Indices – The June S&P 500 emini ES contract is down at 1539.00 and is down 60 ticks.
Gold – The April gold contract is trading up at 1603.10 and is up 107 ticks from its close.

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


Initial Conclusion: This is a mainly correlated market, 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 higher which is not correlated with the US dollar trading up.   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.  It would that over the weekend the Euro-zone and the IMF decided to assist the island nation of Cyprus with a 10 Billion Euro bailout as the nation was on the brink of bankruptcy.  By the same token they also decided to charge depositors with a levy for doing so.  So depending upon how money the depositors have in their accounts, they will be charged a percentage of that sum; which varies based upon on how much money they have.  This in turn caused the Euro to drop dramatically and the USD to rise.  The Euro dropped to a low of 1.2892 and is now starting to rise.  This caused the Asian markets to close lower and currently Europe is trading lower across the board.  Gold has shot up due to the fear factor in the markets.  It would seem as though we aren't done with the European Contraction and I'm surprised at Christine Lagarde.  She always struck me as the adult in the room and severely criticized Hank Paulsen for allowing Lehman Bros. to fail (she was right).  So now if a depositor has over 100,000 Euros in their bank account (or more) they will pay up to 9.9% as a levy.  The Cryriot government has announced that they will revise these percentages to a lower amount and it is helping to stabilize the markets.  Time will tell is this is a one day event or will extend to a longer period.


Possible challenges to traders today is the following

  1. NAHB Housing Market Index is out at 10AM EST.  This is major. 
  2. No other economic news.
  3. Lack of economic news/

On Friday we said our bias was to the downside because the bonds were trading higher.  The net result being that the Dow closed 25 points lower.  Today the markets are nearly correlated but are correlated to the downside as such our bias is to the downside.  Here's why. All of Asia closed lower and Europe is currently trading lower.  Both the USD and Bonds are trading higher.  When bonds are higher, this is bearish for the indices.  Could this change?  Of course.   Remember anything can happen in a volatile market.

Much debate has erupted from this past weeks’ CPAC conference.  Noticeably absent was Governor Chris Christie of New Jersey, but I guess it doesn’t pay to get too close to the President.  Despite the fact that you need federal funds to help rebuild your state.  Paul Ryan wants to be known as the man who saved Medicare but quite frankly it would appear as though he going to be known as the man who torpedoed Medicare.  Additionally the GOP is once again attempting to get rid of the Affordable Care Act aka Obamacare.  If you were to ask me it doesn’t seem as though the GOP has learned anything from this past election cycle.  They’re still attempting the same obstructionism that got us into this situation.  The President offered them a “dove” in terms of comprising on Social Security.  He offered to propose chained CPI as a means of cost-of-living adjustments.  The GOP neither gave nor promised anything in return.  Apparently this isn’t good enough for the GOP. 

Let’s examine something.  We have two major issues to deal with in the United States.  One is the sequester which is currently underway and the other is the debt ceiling which will happen around the May timeframe unless something is resolved now.  These two issues will lead to an even bigger problem in the United States as the longer these issues remain unresolved we’ll have the looming specter of recession hanging over our shoulders.  But I have no doubt that should this occur (and I hope it doesn’t); the DC crowd will have no problem playing the blame game with each other.  What they keep on forgetting is that the American people are stuck in the crossfire.

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.

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. On Friday crude dropped to a low of 93.01 a barrel and held.  Even this morning with the fiasco going on in Europe, crude went to a low of 92.17.   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.  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.
To view previous issues of Market Tea Leaves visit our archive.

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