Thursday's VUE 4/25/2013

Good Morning World...

Opening VUE:

1. Yesterday was extremely choppy as forecast in the Wed. VUE.  
2. The Jobless Claims report was much better than expected.  It was reported that 339,000 made new claims, down from 352,000.  The report is certain to be a positive influence on the USA stock market today.  
3. The US dollar is losing ground today against almost every currency.  This suggests a risk-on day (which again will be positive for overall stock market - not just the DOW).  
4. Gold and Oil are both up substantially.  
5. UK 1st QTR GDP printed stronger than expected.  Can austerity be implemented and still eke out a small growth?  UK has done so, and will certainly celebrate what would be a 1% growth in GDP for 2013. None-the-less, from an outsider's perspective, the UK has far too many problems before the currency and the country's ability to compete strongly.
6. Over night trading is up.  The trading suggests today could be a trend, and it could (did I stress could - not would) be to the upside.  Traders should be cautious, however.  Economic news in April overall has been poor (again with a good initial jobless claim today helping.

6:51 PDT -- The 1st half hour looks like we will have a choppy day in the stock market.  The good news was factored in when it was released.  At 8:00 AM today, the Kansas City Fed Manufacturing Index will be released.  It will not usually drive the market.   Robert Schiller (Yale Professor and important market mover) said "The 32-year decline of interest rates and inflation may soon end with a thud."  

I suspect Dr. Schiller is looking at the numbers on a classical basis, and is still not factoring in the demographic change that has taken place with the retirement of the Baby Boomers.  I will warn every reader, that demographics (and their interpretation) are very important (and interpretations controversial).

10:29 PDT - market is trending up, and not chopping at the moment.  However, the market has struggled going up.  I will remind my readers that Price is what Price is, and whether the market justifies the up-trend is not important.  What is important is the market is going up, but losing momentum after the 1st hour of trading.

Worth Considering:

As usual, the stock market and the economy are giving confusing signals.  As my readers know, I look at currencies to understand more about the global economy.  The following is information that MAY (stress may) assist in understanding of short term directions in the USA stock market.  

Japanese Yen:

Readers, if we look no further than the currencies.  After the tweet that caused a market crash this week and then a recovery in minutes, the stock markets world-wide fell as no-one (except the hacker) knew for sure the Tweet was a hoax.  The inter-relationships of the markets caused a reverberation throughout the stock markets: to be expected.  This is the global interconnectedness of global trading today, and it is the world of High-Frequency-Trading.  

However, the currencies in the FOREX market did not move substantially against the US dollar.  The Euro, the Pound, the Swiss Franc, the Canadian dollar and the Australian dollar had a very muted reaction to the uncertainty.  It was a non-event.  

The EXCEPTION Japanese Yen:

The Yen indeed had a reaction and it mirrored the US stock market.  

(From ForexFactory.com)

Now that is interesting, because it provides us retail traders insight into a murky world called High Finance.  

While relationships like these may be temporary, they are important now due to the central banks QE.  (Such relationships may disappear if the markets are ever allowed to be "free markets" again.)  
There is little doubt there is a direct relationship between the path of the US indexes and the Japanese Yen ever since Big Abe took over Japan's leadership.

In order to understand then risk/on risk/off trading (because fundamentals - as asserted in this blog - have minimum effect now on equities at this point) the Japanese Yen provides the insight.

The Yen currency is weakening.  Do you have any doubts about that?  We could look at the USD/YEN pair, but that is confusing.  Instead, let's look at the futures contract from CME.

This is a "crash" if you are invested in YEN, but a god-send if you invested in the S&P 500 or the Nikkie Index. Do you understand that?  Now I will overlay the S&P 500 futures contract over the YEN (just daily, because the mini-crashed happened in only a few minutes).  

The chart shows Japanese Yen and the S&P 500 in 2013 are directly (and inversely) related.  As the YEN decreases in value the S&P rises.  (This holds true for the DOW as well.)  

As of yesterday, then, the YEN has shown strength at the bottom (technicians may be tempted to call this a double-bottom).  

This is clearly a risk-on correlation.  The concept is to use this a guide to what to what may occur in the US stock market on any real strength in the Yen.  Or in other words, investors would take out more insurance on long positions if the YEN strengthens.  

Watch for the YEN (FOREX markets) to "drop" to 92. If you want to get a better "FEEL" of how the "big money" thinks watch the risk-on / risk-off trade in Dollar/Yen.

If we think there will be a June swoon (ah those SF Giants and their June Swoon) then the Yen should provide warning.  If the Yen continues to weaken any upcoming pullbacks in the S&P 500 (and DOW) will likely be weak similar to what we are able to observe all through 2013.  Or in other words, any correction will be shallow and brief if the Yen continues to weaken.

You can get free charts at www.forexfactory.com on the USD/YEN pair.  
Finally - a should (but will it) 
Any break of the above 100 on the above chart will propel the S&P 500 above 1600.  If you've studied the "carry trade" you will fully understand why.