Monday, March 11, 2013

Pre-Market Global Review - 3/11/13 - Were the Jobs Numbers Really that Good?

Good Morning Traders,

As of this writing 5:20 AM EST, here’s what we see:

US Dollar – Up at 83.020 the US Dollar is up 59 ticks and is trading at 83.020.
Energies – April Oil is down at 91.62.
Financials – The 30 year bond is up 3 ticks and is trading at 141.03. 
Indices – The March S&P 500 emini ES contract is down at 1548.00 even and is down 6 ticks.

Gold – The April gold contract is trading up at 1578.40 and is up 15 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 Shanghai and Hang Seng, the rest of Asia closed higher.  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.
On Friday we said our bias was neutral due to the USD trading higher.  The USD cracked the 83 level on Friday and is still trading there now, but we also knew that Friday was Jobs Friday and everything could change depending upon the report.  As such, the Dow gained 68 points due to the gain in jobs.  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.  Europe is trading lower and there's no major economic news to propel the markets higher.  This could be the day that the Smart Money decides to take capital off the table.  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 Friday, the USD was trading higher and the markets were poised to go lower but didn't.  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. 

On Friday the monthly Jobs Report was issued with great fanfare over a gain of 236,000 net new jobs created.  Whereas this is positive news, I have to wonder were the numbers really that good?  The US economy has lost 8 million jobs since 2008.  From 2009 to the present day the economy has gained about 3 million jobs which leaves a deficit of 5 million jobs lost.  The Bureau of Labor Statistics does a deplorable job of accounting for those people.  The attitude is that once a person has exhausted their unemployment benefits, they are considered to be "working" after all they must be doing something, right?  Wrong.  They're still looking for work and haven't found anything meaningful.  The real issue is that unfortunately there aren't enough jobs to go around and for the jobs that are available they are either menial jobs that pay minimum wage or jobs that are so far out of reach that no one will be able to fill them.  

Employers today are in no mood to hire and will only do so when absolutely necessary.  They site the reasons for this as follows:
 - Increased Regulation
 - Lack of overall economic growth
 - Lack of demand for their products and services
 - Lack of clear direction from Washington, DC
On one side they are correct especially when it comes to lack of clear direction from the DC crowd.  In prior recoveries we always had a clear sense of direction as to what the overall game plan and strategy was.  During the Reagan years it was to reduce government regulation, in the Clinton Era it was build up Technology and focus on our strengths.  That is not happening now. On the other side of the coin, the employers themselves complain that they have two million job openings but can't find "qualified" people to fill them.  Let's examine that for a moment.  Any employer today will tell you that they want the "best" people but they have yet to define what that is.  Invariably they will say the best educated, yet I know MBA's who are out of work and graduated from Ivy League schools.  

Their problem?  Lack of experience.  For those who do fit the bill, employers now look at personal characteristics.  Where did the person grow up?  Are they liberal or conservative?  What are their values?  Why do you think employers today subject applicants to battery of personality tests, psychology tests?  It's all with the intent of finding the "best" candidates.  Why?  Because hiring managers don't know how to make decisions and they view every decision as a "career" decision.  They need justification because they don't trust their own instincts.   We have a serious lack of leadership in Corporate America today.  I come from the age of Charles Revson.  Charles Revson was the founder of Revlon Cosmetics and had written a book called Fire and Ice.  In it he stated "supervisors are a dime a dozen, just give me the people that will work."  In other words, give me the people that have the desire to work and I'll make sure they're utilized because that's my job.  We don't have that today, but we certainly have millions who have the desire. 

On the political front, it doesn't appear as though there's anything new under the sun.  The President called for compromise in his weekly address but I think that will fall on deaf ears as the GOP is in no mood to do so.  Some of those members were surprised to learn that Obama has already cut 1.4 Trillion dollars from the budget but at the end of the day they'll follow the party line and stick to their leaders as it's the safe play.

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.  Look at what happened Friday with the Dow going to an all time high?  Does anyone remember 2007 when that last happened?  Didn't last too long, did it?  The point that I'm trying to make is don't be so fooled into believing that "this time it will be different."  The Smart Money has been pulling that ever since there's been a market.  What goes up will come down and vice-versa.  

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. On Friday crude dropped to a low of 90.83 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.  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 articles of Market Tea Leaves visit our archive.

To Subscribe Click Here: