Once again the the markets suffered through another bout of relentless selling and risk aversion. Today the selling began before NY opened and intensified during the Wall St. session. Crude maintained its role as the leading 'fear trade' and the market which took equities and several of the higher-risk, higher-yielding currencies to fresh weekly lows.
In the earlier European session a stronger than expected German Factory Orders report sent both crude and the EUR/USD to their day highs... the EUR/USD spiked up to the 1.4050 level while spot crude simultaneously made an attempt at the $65 level. Both moves, however, were unsustainable. After the EUR/USD took out stops on its spike up and crude came under selling pressure, both correlated markets began falling in tandem.
The S&P 500 futures and Dow futures made their daily highs the same moment spot crude and the euro were making their highs and then they all came tumbling down together, just as their correlation dictates. Basically, market participants couldn't find any real reasons to buy, so they sold. There were no US fundamentals to get euphoric over, no central bankers out talking the markets up, participants had zero to work with and nothing to switch the emotional sentiment out of the fear trade.
This afternoon's 3-year Treasury note auction wasn't spectacular, the yield was a little high and Wall St. didn't like that too much. The stories and threats of market regulation certainly didn't help matters or bring any confidence back into the markets. A few weeks ago market participants were under the impression that the UK economy was in recovery mode but this morning's UK fundamentals told a different story, both data sets printed much worse than expected and negative. It was another rough day for the bulls and probably gave the bears even more confidence to continue the markets in this direction until some news, fundamentals, central bankers or geo-politics changes the sentiment.
Sign of the times and market psychology:
On 11-July 2008 crude oil began its fall from glory and took all the markets down with it over the course of the proceeding 8-months. Crude got the ball rolling last summer and once again we see history in the process of repeating itself, to a slightly lesser degree. Crude's latest run peaked on 30-June above the $73 level and since then has done nothing but sell-off, dragging equities and commodities with it and boosting the dollar and yen as a result. How much of last summer's history is going to repeat itself? I can't say or predict, but I can clearly see desperation in these markets and the sign of desperation can mean things may get a little ugly and nasty in the near-term. But, it will not last forever...
Last summer as crude began to crack, the famous crude bull, T. Boone Pickens, went to great lengths to talk it up to protect his multi-billion dollar oil hedge fund. Last summer he was making claims about crude going to $300 and once again this summer he's out trying to talk crude up, saying it will return to $147. His attempts to stop the slide are purely out of desperation, it's obvious. Even the US energy department is trying to talk crude back up, saying crude will make gains toward the $100 level due to increased demand.
What can us traders take away from all this and from what we are seeing play out in the markets right now? First of all, because we know history repeats itself, prepare to see history repeat itself to one degree or another... the other thing is to look for continuing signs of desperation in the markets. Fear and desperation go hand-in-hand and as those two emotions work together to control the trading decisions of market participants, it usually means prices decline which translates into the type of selling we've seen over the past few weeks.
Now, there is a point where the fear and desperation reaches an unsustainable level, leading to reversals in price valuation and market direction. One of the best ways traders can spot that type of turning point is when everybody is saying its the end of the world, it's all over, and conditions have reached the point of no return. When it comes to markets and trading, the majority and the masses are always wrong, especially in the Forex market.
There is only one trend in the markets right now and that trend is emotion. The markets are running on pure emotion and history also tells us that when the masses are running on emotion, they ultimately make the wrong trading decisions. Their emotions act like some kind of weird mind control force that compels the masses to repeatedly pile into the last 5% of an overall market move. Just like when the S&P 500 and Dow broke the supposedly magical 200-day moving average the masses were screaming buy, buy, buy but the market went bye, bye, bye from that moment and hasn't stopped to look back.
As much as I loathe financial entertainment networks like CNBC and Bloomberg I have learned to use them as a resource to find out what the prevailing mindset is, what the emotional state of the markets are, and when the emotions of either fear or greed are reaching their climax so I know when it's most advantageous to do the opposite of the masses.
The S&P 500, Dow, and crude oil may continue in a season of selling and depreciated price valuations and obviously this would mean the US dollar and Japanese yen continue to gain ground on the majors and crosses, but I'm fairly confident in saying that when I see the majority of market participants and the masses join the bear side, I will know that the dumbest of the dumb money has piled into the last 5% of the market's move and hopefully I'll have the insight to know to run the opposite direction.
The masses totally got it wrong when they pushed the Dow Jones and S&P 500 to their all-time historical highs in the midst of the worst credit crisis and economic depression since the 1930's. The credit crisis began exactly on Sunday, August 12, 2007 and the US recession was in full bloom by December 2007, yet the equity, commodity, and Forex markets continue rising at an unprecedented pace. The US housing market was in full meltdown mode back in March of 2007 but the masses were still trying to flip homes, buying investment properties, and were taking out second and third mortgages.
It basically took a year for the masses to totally pile into the wrong side of every tradeable market on earth before the market itself ran the opposite direction and reversed on them. Traders can absolutely profit from playing along with the emotionally-driven masses, there's nothing wrong with that but don't lose sight of the very tried and true principle of all tradeable markets -- the longer things stay the same, the more they need to change.
Wednesday trading:
The main themes for tomorrow will focus squarely on fundamentals, central banks, and geo-politics. The G8 will become the center of the universe as their 3-day meetings kick off in Italy. They should really change the name of the G-8 to the G-80 because everybody and their brother will be there but what we need to be on the lookout for is any pro or anti dollar rhetoric out of the BRIC nations and of course from the Fed, ECB, BOE, and BOJ. China, Russia, and Brazil are the three wild cards because they hold the power and potential to push the dollar around the rest of this week.
Both the dollar and yen have benefited positively from the sell-off on Wall St. and the plunge in crude prices but I still have no overall confidence in either currency due to their abysmal fundamental situation and the fact I believe the Fed will have to keep printing money to rescue the economy. We will hear growing talk of congress coming up with a new multi-billion dollar economic stimulus plan as the US fundamentals and weakness on Wall St. persists and that may turn some negative focus back onto the dollar.
Beside the G8 event, the markets will contend with Eurozone GDP and German Industrial Production data. Out of the UK there is an inflation report and then later in the NY session we get Crude Oil Inventories which should cause a nice dose of volatility with crude being under the microscope right now.
The most important job for traders the next three days is to be diligent to keep up with all the verbal rhetoric and verbal manipulation that comes out of the G8. If the central bankers and finance ministers want to talk the markets up or down, they will use the G8 event as their opportunity to do so. Don't let them catch you off guard because they love to use the element of surprise to move the markets. The trading conditions will be risky tomorrow as Wednesday's have been following a trend as the most volatile trade day of the week, so manage your risk accordingly.
-David
In the earlier European session a stronger than expected German Factory Orders report sent both crude and the EUR/USD to their day highs... the EUR/USD spiked up to the 1.4050 level while spot crude simultaneously made an attempt at the $65 level. Both moves, however, were unsustainable. After the EUR/USD took out stops on its spike up and crude came under selling pressure, both correlated markets began falling in tandem.
The S&P 500 futures and Dow futures made their daily highs the same moment spot crude and the euro were making their highs and then they all came tumbling down together, just as their correlation dictates. Basically, market participants couldn't find any real reasons to buy, so they sold. There were no US fundamentals to get euphoric over, no central bankers out talking the markets up, participants had zero to work with and nothing to switch the emotional sentiment out of the fear trade.
This afternoon's 3-year Treasury note auction wasn't spectacular, the yield was a little high and Wall St. didn't like that too much. The stories and threats of market regulation certainly didn't help matters or bring any confidence back into the markets. A few weeks ago market participants were under the impression that the UK economy was in recovery mode but this morning's UK fundamentals told a different story, both data sets printed much worse than expected and negative. It was another rough day for the bulls and probably gave the bears even more confidence to continue the markets in this direction until some news, fundamentals, central bankers or geo-politics changes the sentiment.
Sign of the times and market psychology:
On 11-July 2008 crude oil began its fall from glory and took all the markets down with it over the course of the proceeding 8-months. Crude got the ball rolling last summer and once again we see history in the process of repeating itself, to a slightly lesser degree. Crude's latest run peaked on 30-June above the $73 level and since then has done nothing but sell-off, dragging equities and commodities with it and boosting the dollar and yen as a result. How much of last summer's history is going to repeat itself? I can't say or predict, but I can clearly see desperation in these markets and the sign of desperation can mean things may get a little ugly and nasty in the near-term. But, it will not last forever...
Last summer as crude began to crack, the famous crude bull, T. Boone Pickens, went to great lengths to talk it up to protect his multi-billion dollar oil hedge fund. Last summer he was making claims about crude going to $300 and once again this summer he's out trying to talk crude up, saying it will return to $147. His attempts to stop the slide are purely out of desperation, it's obvious. Even the US energy department is trying to talk crude back up, saying crude will make gains toward the $100 level due to increased demand.
What can us traders take away from all this and from what we are seeing play out in the markets right now? First of all, because we know history repeats itself, prepare to see history repeat itself to one degree or another... the other thing is to look for continuing signs of desperation in the markets. Fear and desperation go hand-in-hand and as those two emotions work together to control the trading decisions of market participants, it usually means prices decline which translates into the type of selling we've seen over the past few weeks.
Now, there is a point where the fear and desperation reaches an unsustainable level, leading to reversals in price valuation and market direction. One of the best ways traders can spot that type of turning point is when everybody is saying its the end of the world, it's all over, and conditions have reached the point of no return. When it comes to markets and trading, the majority and the masses are always wrong, especially in the Forex market.
There is only one trend in the markets right now and that trend is emotion. The markets are running on pure emotion and history also tells us that when the masses are running on emotion, they ultimately make the wrong trading decisions. Their emotions act like some kind of weird mind control force that compels the masses to repeatedly pile into the last 5% of an overall market move. Just like when the S&P 500 and Dow broke the supposedly magical 200-day moving average the masses were screaming buy, buy, buy but the market went bye, bye, bye from that moment and hasn't stopped to look back.
As much as I loathe financial entertainment networks like CNBC and Bloomberg I have learned to use them as a resource to find out what the prevailing mindset is, what the emotional state of the markets are, and when the emotions of either fear or greed are reaching their climax so I know when it's most advantageous to do the opposite of the masses.
The S&P 500, Dow, and crude oil may continue in a season of selling and depreciated price valuations and obviously this would mean the US dollar and Japanese yen continue to gain ground on the majors and crosses, but I'm fairly confident in saying that when I see the majority of market participants and the masses join the bear side, I will know that the dumbest of the dumb money has piled into the last 5% of the market's move and hopefully I'll have the insight to know to run the opposite direction.
The masses totally got it wrong when they pushed the Dow Jones and S&P 500 to their all-time historical highs in the midst of the worst credit crisis and economic depression since the 1930's. The credit crisis began exactly on Sunday, August 12, 2007 and the US recession was in full bloom by December 2007, yet the equity, commodity, and Forex markets continue rising at an unprecedented pace. The US housing market was in full meltdown mode back in March of 2007 but the masses were still trying to flip homes, buying investment properties, and were taking out second and third mortgages.
It basically took a year for the masses to totally pile into the wrong side of every tradeable market on earth before the market itself ran the opposite direction and reversed on them. Traders can absolutely profit from playing along with the emotionally-driven masses, there's nothing wrong with that but don't lose sight of the very tried and true principle of all tradeable markets -- the longer things stay the same, the more they need to change.
Wednesday trading:
The main themes for tomorrow will focus squarely on fundamentals, central banks, and geo-politics. The G8 will become the center of the universe as their 3-day meetings kick off in Italy. They should really change the name of the G-8 to the G-80 because everybody and their brother will be there but what we need to be on the lookout for is any pro or anti dollar rhetoric out of the BRIC nations and of course from the Fed, ECB, BOE, and BOJ. China, Russia, and Brazil are the three wild cards because they hold the power and potential to push the dollar around the rest of this week.
Both the dollar and yen have benefited positively from the sell-off on Wall St. and the plunge in crude prices but I still have no overall confidence in either currency due to their abysmal fundamental situation and the fact I believe the Fed will have to keep printing money to rescue the economy. We will hear growing talk of congress coming up with a new multi-billion dollar economic stimulus plan as the US fundamentals and weakness on Wall St. persists and that may turn some negative focus back onto the dollar.
Beside the G8 event, the markets will contend with Eurozone GDP and German Industrial Production data. Out of the UK there is an inflation report and then later in the NY session we get Crude Oil Inventories which should cause a nice dose of volatility with crude being under the microscope right now.
The most important job for traders the next three days is to be diligent to keep up with all the verbal rhetoric and verbal manipulation that comes out of the G8. If the central bankers and finance ministers want to talk the markets up or down, they will use the G8 event as their opportunity to do so. Don't let them catch you off guard because they love to use the element of surprise to move the markets. The trading conditions will be risky tomorrow as Wednesday's have been following a trend as the most volatile trade day of the week, so manage your risk accordingly.
-David
Leave a comment