FOMC Comments Deflate Dow

As of this writing 4:40 AM EST, here’s what we see:

US Dollar –Down at 83.345, the September US Dollar is down 41 ticks and is trading at 83.345.
Energies – August Oil is up at 96.57.
Financials – The September 30 year bond is down 19 ticks and is trading at 135.08.
Indices – The September S&P 500 emini ES contract is up at 1602.75 and is up 14 ticks.
Gold – The August gold contract is trading up at 1241.70 and is up 180 ticks from its close.

Initial Conclusion: This is a correlated market and thus far it is correlated to the upside. The dollar is down and oil is up which is normal and the 30 year bond is trading lower. 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 up and the US dollar is trading higher, which is not correlated. Gold is trading higher which is correlated with the US dollar trading down. 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 higher with the exception of Singapore which closed fractionally lower. As of this writing all of Europe is trading lower with the except of London which is trading fractionally higher. A report came out from Der Speigel that stated that the NSA was spying on the EU headquarters in both Washington, DC and Brussels and at this hour it is driving some of the exchanges in Europe lower.

Possible challenges to traders today is the following
1. Final Manufacturing PMI is out at 9 AM EST. This is major.
2. ISM Manufacturing PMI is out at 10 AM EST. This is major.
3. Construction Spending is out at 10 AM EST. This is major.
4. ISM Manufacturing Prices are out at 10 AM EST. This is not major.

On Friday we said our bias is neutral as it seems that every instrument was trading higher except Gold. A neutral bias means the market could go in either direction. Having the Chicago PMI coming in far less than expected didn't help matters as the Dow dropped 114 points and the other indices didn't fare too well either. Today we are dealing with a correlated market and as such our bias is to the upside. Could this change? Of course. Remember anything can happen in a volatile market.

On Friday we said the market bias was neutral which generally means "hang on to your money". As it was the last day of the quarter I would have advised caution anyway as in prior years we used to have a phenomena called "window dressing" which is a polite way of artifically propping up share prices to make them look more attractive. Not so much in recent times. We do however have the issue of mixed signals from the Fed as on Friday prior to market open, FOMC Member Stern suggested that the Fed may taper off the 85 billion dollar buyback program as early as September. That's all it took to send the markets reeling. Now I said this talk wouldn't amount to much as Stern is not an "A" player in the Fed world, yet this comment was enough. What makes this tough is we keep getting mixed signals from the Fed on this matter. Some say don't worry about it and others (like Stern) make these ridiculous comments that have a negative effect on markets. In the business world we used to have an unwritten rule that basically said if you represent an entity (whatever that may be) you sing from the same hymn book. In other words whomever someone speaks to in that company, the message needs to be the same regardless of who they talk to. I saw this firsthand in the technology world years ago when SAP was making inroads in the United States. Whomever someone spoke to at SAP, the message was the same: "We don't negotiate price and we will cost justify why you should spend what we suggest." To my knowledge no one ever broke that rule. It's a shame that the Fed doesn't practice the same as what they say has an impact on global markets.

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 our bias is to the upside. Could this change? Of course. In a volatile market anything can happen. We'll have to monitor and see.

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. On Friday August crude dropped to a low of 96.33 a barrel and held. We'll have to monitor and see if crude either goes lower or holds at the present level. It would appear at the present time that crude has support at 95 a barrel and resistance at 98. 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:
- Budget Battle - ongoing.
- Debt Ceiling in the August time frame.
- Asian Contagion - happening now

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 economic reports are released and 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.

Nick Mastrandrea is the author of Market Tea Leaves. Market Tea Leaves is a free, daily newsletter that discuses and teaches market correlation. Market Tea Leaves is published daily, pre-market in the United States and can be viewed at www.markettealeaves.com Feel free to visit and subscribe.