Wednesday, March 13, 2013

Pre-Market Global Review- 3/13/13 - Correction Ahead?

Good Morning Traders,

As of this writing 6:15 AM EST, here’s what we see:

US Dollar – Down at 82.840 the US Dollar is down 10 ticks and is trading at 82.840.
Energies – April Oil is up at 92.84.
Financials – The 30 year bond is up 3 ticks and is trading at 141.21. 
Indices – The March S&P 500 emini ES contract is down at 1551.00 and is down 6 ticks.
Gold – The April gold contract is trading down at 1591.10 and is down 6 ticks from its close.

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

Initial Conclusion: This is not a correlated market.   The dollar is down- and oil is up+  which is normal but 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 lower which is not correlated.  Gold is trading down which is not correlated with the US dollar trading lower.   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.  

Possible challenges to traders today is the following

  1. Core Retail Sales is out at 8:30 AM EST.  This is major. 
  2. Retail Sales is out at 8:30 AM EST.  This is major.
  3. Import Prices are out at 8:30 AM EST.  This is not major
  4. Business Inventories are out at 10 AM EST.  This is not major.
  5. Crude Inventories are out at 10:30 AM EST.  This will move the crude market.
  6. 10 Year Bond Auction at 1 PM EST.
  7. 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 Dow spent most of the day in negative territory and closed fractionally higher at 3 points.  The rest of the indices closed lower.  Today the markets are not correlated at all.  As such our bias is to the downside.  Here's why.  The markets (as of this writing) are completely uncorrelated.  Asia closed lower and Europe is currently trading lower.  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.
Today we'll focus on the markets.  The political front is unchanged and Paul Ryan wants to be known as the man who saved Medicare.  One of the aspects that have occurred recently 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 question is why is this happening?  I have a theory and it's this: If you're a high net worth individual and your total household income exceeds $400,000; you know that starting this year you're going to pay higher taxes.  Whereas prior to 2013 your tax rate at the high end was 36%, this year it will go up to 39.6%.  That's 3.6% higher than you would have paid.  3.6% times 400,000 is $14,400 dollars that household has in taxable liabilities.  That means that they have to hand over $14,400 to Uncle Sam because the law says so.  That is the last thing any high net worth wants to do.  As to augment that hit they have to figure out ways of increasing income to supplement that liability.  Given that these people aren't crimminals the only way to legally do this is to increase exposure to the market.  
So ignore fundamentals, ignore warning signs that something isn't right.  The market's going to newer higher each and every day; let's capitalize on it.  That will work until the Smart Money finally wakes up (and sooner or later they will) and you as a trader could be stuck on the wrong side of the market.  And that will be painful.       

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 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 crude dropped to a low of 91.60 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 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 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.

To view previous issues of Market Tea Leaves visit our archive.