Negative Divergence

By: Erik Swarts | Wed, Apr 13, 2011
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If nothing else, what a fascinating market environment to be swimming in.

Image 1

And yet, I'm sure every generation feels the same degree of narcissism towards their place in history.

Maybe we're not that special and should drop the drama.

Markets go up, down and sideways - no?

"Things change, people change - hairstyles change...interest rates fluctuate." - Top Secret, 1984

Just because you're a part of the Quantitative Generation (Gen Q as my kids like to call it) doesn't give you the right to claim the mantel on the Wall of Shame.

Gen Y did bring us Snookie... and the Snuggie.

And yet, even in the face of such massive disachievement (trust me, it's an anthropologic term), I can't help but recall the Summer of 2007 in here. Markets were swooning; Chuck Prince was dancing; Jimmy Cayne was toking. We were walking on the precipice - moving along the hinge.

Interestingly enough, the markets were about to call Bernanke to the Court of Stimulus - he so famously now adjudicates. Perhaps they are getting ready to test his hand once again as we approach the conclusion of QE2. It would make for an interesting bookend.


 

A few things in the charts remind me of that intermediate top in late July 2007. Namely, the momentum in the markets and how they are reflected in a few of the technical metrics I follow. The key words here are negative divergence.

SPX Daily 2006-2007

It may be useful to use the late 2007 tape as a fractal guide over the next several weeks. None of us can see around the bend in the road, but we can look for the guideposts.

SPX Dailiy 2010-2011

Another aspect that is reminiscent of 2007 is the underperformance of the financial sector. By the summer of 2007, the financials (BKX) had already been in a declining trend of lower highs and lower lows for over four months. They were the canary in the market's internal mine and foreshadowed the eventual top in the broader indices. I am watching them again with great attention to see if they can get off the mat and start leading the market higher from here. If they can't catch a bid this earnings season, it doesn't bode well for the market going forward.

So stay frosty traders.

 


 

Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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