Mega Merger Rules the Day
|Good Morning Traders,
As of this writing 4 AM EST, here’s what we see:
US Dollar: Dec. USD is Up at 98.790.
Energies: December Crude is Up at 50.70.
Financials: The Dec 30 year bond is Up 5 ticks and trading at 164.15.
Indices: The December S&P 500 emini ES contract is 11 ticks higher and trading at 2147.00.
Gold: The December gold contract is trading Up at 1269.20. Gold is 55 ticks higher than its close.
Initial Conclusion
This is not a correlated market. The dollar is Up+ and crude is Up+ which is not normal and the 30 year bond is trading Up. 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 Crude is trading Up which is not correlated. Gold is trading Up 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.
Asia traded mixed with about half the exchanges trading higher and the other half lower. As of this writing all of Europe is trading higher.
Possible Challenges To Traders Today
– HPI m/m is out at 9 AM EST. This is major.
– S&P/CS Composite-20 HPI y/y is out at 9 AM EST. This is major.
– CB Consumer Confidence is out at 10 AM EST. This is major.
– IBD/TIPP Economic Optimism is out at 10 AM EST. This is major.
– Richmond Manufacturing Index is out at 10 AM. This is major.
Treasuries
We’ve elected to switch gears a bit and show correlation between the 30 year bond (ZB) and The YM futures contract. The YM contract is the DJIA and the purpose is to show reverse correlation between the two instruments. Remember it’s liken to a seesaw, when up goes up the other should go down and vice versa.
Yesterday the ZB made it’s move at around 11:30 AM EST after the FOMC members spoke. The ZB hit a low at around that time and the YM hit a high. If you look at the charts below ZB gave a signal at around 11:30 AM EST and the YM was moving higher at the same time. Look at the charts below and you’ll see a pattern for both assets. ZB hit a low at around 11:30 AM EST and the YM hit a high. These charts represent the latest version of Trend Following Trades and I’ve changed the timeframe to a 30 minute chart to display better. This represented a long opportunity on the 30 year bond, as a trader you could have netted about 10 plus ticks per contract on this trade. Each tick is worth $31.25. We added a Donchian Channel to the charts to show the signals more clearly.
Charts Courtesy of Trend Following Trades built on a NinjaTrader platform
Bias
Yesterday we gave the markets a neutral bias as Crude and the Bonds were trading higher and ordinarily this should represent a downside bias however the indices were all trading higher yesterday morning. The Dow closed up 77 points and the other indices were higher as well. Today we aren’t dealing with a correlated market and our bias is neutral.
Could this change? Of Course. Remember anything can happen in a volatile market.
Commentary
Yesterday we had no real economic news to speak of save a couple of FOMC Members speaking. So what drove the markets higher? The news that AT&T will be buying Time Warner. We haven’t seen a mega merger in quite some time so the markets reacted positively to this. So now all of us who have HBO will be paying AT&T for the privilege. So what did the FOMC Members speak about? Interest rates of course. One member suggested 3 rate hikes in 2017. I personally think it’s a bit far fetched because we don’t know how the new administration will react to the economy nor does the Fed know what stance the administration will have on Wall Street. If Hillary gets in, nothing will probably change unless the far left portion of the Democratic party can hold her feet to the fire to enact change. But as in all things, only time will tell.
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