Appraising Risk

By: Erik Swarts | Tue, Jun 7, 2011
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Because I focus on characterizing the broader markets themselves, I search for eclectic reference anomalies to assess their relative health. And because I don't feel the need to shell out $1500 a month to utilize a Bloomberg terminal (as wonderful as they are) - I rely on my own resourcefulness to accommodate my simplistic research needs.

One such tool has been to keep an eye on a position like FCT. FCT is a close ended fixed income mutual fund that primarily invests in senior floating rate loans made to mid tier corporate borrowers. Its utility on my screen has been to appraise credit risk sensitivity. And while we know corporations have been drinking profusely from Bernanke's more than accommodative monetary trough - it still warrants watching how the instrument trades relative to its past price action. In the past when FCT hits an air pocket in the credit or interest rate markets and collapses, it almost always precedes a sharp reversal lower in the equity markets. I utilize a stochastic oscillator in the charts to color the relative degree of the approaching equity market weakness. Namely, if the oscillator collapses suddenly after trending above the top rail it usually translates into a sharp stock market correction that is likely bought heavily once the market bottoms. If FCT slowly bleeds lower it typically translates into a longer bout of equity weakness.

If this anomaly proves relevant, what we have today appears to be the former as indicated in the momentum metrics. It's interesting to see the VIX also translating lower (over the past year) as it did in the early part of 2007. At the moment (12:00 noon est.), FCT is bleeding lower once again as the market bounces from its oversold condition.

I strongly suspect the equity markets will follow suit - and perhaps in a rather cascading fashion. Should that occur, the VIX will likely trade as it did in late February of 2007.

The associated metrics (RSI, CCI, Stoch) are describing FCT only.

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(Positions in UUP, & VXX)

I just joined Twitter. All my trades and occasional market musings are disclosed in real-time here.



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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