Monday, March 4, 2013

Pre-Market Global Review - 3/4/13 - Obama Signs Sequester


This newsletter provides 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.  

March 4, 2013

Good Morning Traders,

As of this writing 4:45 AM EST, here’s what we see:
US Dollar –Up at 82.495 the US Dollar is up 137 ticks and is trading at 82.495. 
Energies – April Oil is down at 90.39.
Financials – The 30 year bond is up 12 ticks and is trading at 146.07.
Indices – The March S&P 500 emini ES contract is down at 1511.75 and is down 19 ticks.
Gold – The April gold contract is trading up at 1577.40 and is up 51 ticks.
This is a nearly 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 does not correlate 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. 
With the exception of Japan's Nikkei, the rest of Asia closed lower.  As of this writing all of Europe is trading lower.


  Possible challenges to traders today is the following:

-  FOMC Member Yellen speaks at 8 AM EST.  This is major.
-  FOMC Member Powell speaks at 1:15 PM EST.  This is major
-  No Major Economic News.
-  Lack of major economic news..

On Friday we said our bias was to the downside because the markets were correlated to the downside.  However we had major economic news reports that came in better than expected plus vehicle sales had gone up in February which served to drive the markets higher.  The net result was the Dow gained 36 points. Today the markets are nearly correlated to the downside with the outlier being Gold.  Gold is currently trading higher which tells me that the fear factor is starting to take hold.  Therefore our bias is towards the downside today.  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 what happened on Friday, the markets were poised to go lower but didn't.  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.  Click here for a video on why the Dow Rose:

 Well March 1st came and went and over the weekend the President was forced, by law to sign the sequester order.  The order itself is approximately 80 pages in length and no department goes unscathed.  Each and every department will be forced to trim it's operating budget by upwards past 5%.  Medicare will be cut by 2%.  Fortunately Social Security will remain untouched as it is solvent.  Officers serving in any branch of the Armed Forces will have their pay cut by 5%.  The President met with the GOP leadership over the weekend and they are adamant that they will not consider revenue increases (aka tax hikes).  So here we are.  Fortunately many of these cuts will not be implemented immediately but will happen over time.  If something isn't done they will be implemented.  Ironically the reason why there is a sequester to speak of is because when this law was enacted in 2011 it was thought to be so horrific that no one would consider the prospect or possibility of such an event occurring.  Yet here we are, with a sequester enacted. The US Government will officially run out of money by the end of the month, however the President has the right to extend funding should no compromise can be found.  I have no doubt he will do so.

Thus far Wall Street has treated this issue as if it's a famine in China, in other words so far removed that it couldn't possibly have an effect on us.  I suspect that will change if the economy turns sour and we start to have bad economic reports.  For the time being nothing will change as it will take some time before these cuts are felt thru out the economy.  However sooner or later it will.  The longer this issue is present and not resolved, the worse it will be.  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. On Friday crude went to a low of 90.04 a barrel and held there.  I expect this selling to continue and we will monitor crude prices carefully.   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.

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