Trade Team Update

I'm not sure how great today's update will turn out... I got hit with a nasty cold early this morning and have not been very active in the market today, but there's a few key issues I want to cover...

Overall I'd say today's swings should not have come by any surprise. For weeks I've been talking about the re-pricing and re-valuing process taking place in the markets and this morning we saw more evidence of this process wielding its affect on the EUR/USD.

This morning several hedge funds were forced to liquidate and unwind heavy gold positions. Due to the already ill-liquid conditions in all markets, the hedge fund unwinding caused an intense amount of downside pressure on gold as it fell over $55 almost as soon as the gold liquidations began. At the very same moment the hedge funds were unwinding their positions and bringing gold down Treasury yields went up.

From this we see money flows stream out of commodities and into Treasuries. Then later in the afternoon I observed Treasury yields begin to rise while the Dow was beginning to rise. As this event was taking place, the euro was putting in a bottom at the 1.3380 level to eventually wind up pushing towards the 1.3500 level.

So as we look at today's events to make sense of why the markets did what they did, we simply connect the money-flow dots and its makes perfect sense why the markets behaved the way they did... as the money flows came out of commodities and equities, the euro dropped and stayed under downside pressure. Once the liquidation process with the hedge funds was over and those money-flows made their way back into equities, benefiting the Dow and S&P, this helped bring the euro back up.

These are the correlations of the market right now... they've been clear and will remain this way as long as market participants decide to respond this way during the re-pricing process. This doesn't exactly make trading easy because of the ill-liquidity and volatility but at least it makes sense.

Fundamentals:

Well I was wrong -- on Sunday I gave an opinion that I believed the fundamentals would take a bigger role in the market this week. This is not the case at all. Today's USD data was some of the worst seen since the 1970s. My overall forecast for worsening USD fundamentals is playing out but we are not seeing any punishment being given to the dollar.

Industrial Production fell a staggering 2.8% which is the worst drop since 1974. The Philly Fed Index printed at -37.5. It hasn't printed that low since 1990. The NAHB housing index printed its lowest number ever in the history of the index. The numbering of continuing jobless claims reached its highest level in five years. And we still have Wall St. Wonderboy Hank Paulson telling the world the fundamentals of the US are strong.

CPI printed flat... no rise in price pressures month-over-month. In this data we see further evidence of massive and rapid deflation... speaking of deflation, look at the gas pumps. The price of fuel is tumbling around the nation. Here in Nashville gas has dropped a $1 a gallon from its summer highs. That is a big deal to a lot of people here in my town!

I can already see the affect of fuel deflation -- the social establishments are more crowded now that fuel is cheaper. I see more people in restaurants and bars and in the tourist areas of town. These are very good things during times of recession and potential depression.

At some point the dollar will have to pay for these abysmal fundamentals because the negative affects will be seen in the deficit, Trade Balance, Current Account, TIC, and GDP data.

EUR/USD:

Tomorrow we get key housing and building data along with the important Michigan Sentiment. I'm forecasting all three pieces of data to print USD-. If that's how it plays out the bad could downward pressure on the Dow which would put downward pressure on the euro heading into the weekend.

Trading conditions tomorrow could be classified as schizophrenic... what I expect for tomorrow is terribly low amount of liquidity, a good deal of book squaring, and few bigger players with a little bit of liquidity to play with throw their weight around to make some end-of-week profits to satisfy whatever needs at the moment.

If the Dow can somehow manage to perform in the green I would expect the euro to find support against the dollar. Once again dollar LIBOR rates eased and during London the euro found support and strength to move up... it's a very simple process -- if LIBOR continues to ease the euro will be given more breathing room to gain against the dollar.

The hedge funds may do more liquidating tomorrow and this will cause some wild price swings. Crude remains a mess along with gold. I cannot even begin to predict what those two will do tomorrow, they could be brutalized again.

I got a report today from a company called TrimTabs. When I first heard the name I thought they were pushing diet pills or something but it turns out they do market intell. In one of their reports they showed over $43 billion was liquidated within the hedge funds in September. That is a monumental amount to evaporate from the markets. Margin call city...

In that report on the hedge funds we see proof that these markets are terribly ill-liquid and easy to push around, causing the violent and chaotic price swings. Trading tomorrow will carry an extremely high level of risk so please understand this before you decide to pull the trigger.