Cross-Market Surprises for a Monday Morning

Aug 1, 2011: 12:14 PM CST

Traders across the board were thrown for a nauseating loop as we transitioned from the cross-market excitement on Sunday evening that a deal was reached.

That excitement turned to panic as Monday’s market opened, reversing the optimistic gains into sudden “collapse” losses.

Let’s take a look at some of these moves and see what happened, what went wrong, and were do we go from here.

Here’s the current 30-min Cross-Market Perspective:

Taken one at a time, the “Risk-On” markets of Crude Oil and the S&P 500 (left side) showed positive upside movement overnight, then literally collapsed when this morning’s ISM Manufacturing Index came in worse than expected (consensus was 54.3; actual was 50.9).

This threw cold water on the optimism of the Debt Deal agreement as traders addressed two current truths:

1.  The Debt Ceiling Deal was reached, but still faces a potentially contentious vote in the House and Senate

2.  There are other economic news stories that drive markets – it’s not all about the Debt Ceiling

In other words, an official Deal is not official until it passes both chambers of Congress and is signed by the President.  While many people expect that to happen, it’s not happened as of Monday morning.

Also, there’s more economic news affecting the market than the Debt Ceiling discussions.

Suddenly, as if a light-switch flipped, money flooded out of the Risk-On vehicles into the Risk-Off vehicles – resulting in a massive short-squeeze and instant feedback loop (of buying) in Gold and the US Dollar Index.

What now?

As of Tuesday, we’ll either have a signed/passed agreement on the Debt Ceiling or we won’t.

Beyond that, analysts and traders will return to “business as usual” which is to assess fundamental value of securities/assets given current and future/expected economic data.

Technical analysts will note where price resides relative to critical support or resistance areas.  Self-fulfilling prophecies and feedback loops are likely to develop accordingly if a key level is firmly broken in the cross-market landscape.

Short-term traders should manage risk appropriately, which may include reducing position size to compensate for the recent surprise volatility in both directions.

As the saying goes, “This too shall pass,” but it’s not passed yet.  We’re still in a cycle/environment where news is likely to swing the markets violently one way or the other.

News-driven markets often result in more noise and surprise volatility.  New traders tend to fare poorer than experienced traders in volatile environments.

Stay on top of the news – economic and political – and the resulting price moves relative to critical/known support/resistance areas.

We’ll return to normal/standard, non-news gripped markets, but for now, this is what we have until clarity returns.

Adjust accordingly, which may include staying to the sideline out of respect of the current volatility.

Either way, be safe and remain objective.

Corey Rosenbloom, CMT
Afraid to

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1 Comment

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