The Eye Of The Storm

By: Erik Swarts | Mon, Aug 29, 2011
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High Winds Today

As hurricane Irene tests our mettle in the northeast this weekend, the markets set their sites on the historically challenging month of September. Will Irene foreshadow a similar outcome - one of panic and anxiety, yet manageable hardships - or will the market get capsized by the swells emanating from across the Atlantic?

From a risk perspective, the equity markets are my most unsettling piece of the puzzle going forward. My queasiness with stocks comes from the peculiar impression of feeling a greater confidence in my expectations for certain currencies (euro weakness/dollar strength) and the commodity complex (weakness), and the extremely contentious situation being navigated in Europe (so gloomy it's variant to believe it will resolve cheerfully).

Based on what we currently know about the European debt crisis, it seems very likely that at some point in the near future a very large capital commitment will need to be constructed to appease the panicked credit markets. The devil will certainly be in the details of terms, timing and commitments, but by all accounts it will eventually be on the scale of our own undertakings with quantitative easing. To date, the Europeans have been reluctant to collectively embrace a bailout because of the regions political and growth asymmetries and various political conundrums - such as the one evident in Germany today (see Here).

With that said, I believe a resolution will come from the existential perspective that we are all swallowing each others crisis porridge because the act of nonfeasance is still overcome by the collective screams of the world assembly. We find ourselves still walking with the echos of 1998 (see Here) in the charts and the participants reflexes to contagion - except on the public side of the ledger where the commitments will likely need to be 500 times larger than the private LTCM bailout was at roughly 3.6 billion.

I believe it is logical to anticipate that the euro will follow a similar arc with the dollar during the active rounds of QE in which the currency is initially devalued. The question is at what point on the panic continuum will it be engaged and at what level in the equity markets. I believe the charts hold many of those clues and my best guesstimate is we bounce over the next several sessions to between 1230 to 1250 on the SPX before heading back down to around 1100 during the retest. It is likely at the secondary low that the European bazooka will be fired and market participants will reconstitute their appetite for risk.

US Dollar vs Euro
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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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