As The Crow Flies

By: Erik Swarts | Fri, Oct 7, 2011
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Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof. - John Kenneth Galbraith

Truer words have never been spoken when it comes to matters in finance - and it is often the difference between successfully navigating the markets or bleeding through stubborn indignation. If you would like to outperform the indices in conditions such as these, check your dogma at the door and open your peripheral vision to your ego in one corner and that wild dog we like to call alpha in the other. If you trade actively and choose to take your cues from the big ships in finance, it will likely over time be an eroding experience. Simply by virtue of scale, you should be able to sense the ground swell as another front approaches and come about sharply as the larger vessels overreach their course. Need we ask where Zero Hedge would be today if they were not inundated with the constant feed of ill-timed and often misplaced insights to cynically propagate to the abhorrent choir. I am by no means absolved from being on the wrong side of a market opinion, but I work with the market as a fluid exercise - always taking soundings from the tip of the bit and always open to the flip side of the debate. I will trade what I see in the markets in realtime, which keeps the exchange dynamic and moving forward.

So with that said - I have grown increasingly skeptical that we have a "Land Ho!" moment with regards to the equity markets. This weeks low was in hindsight likely just another short term move. This is due to a number of developments, but primarily from the lack of coordination and cohesion on the European front and the piecemeal approach their leaders have chosen to embrace. The fact is there are simply too many cooks in the kitchen serving too many a la carte entrees for a crisis appetite this large. They needed to take a page from Nonna's and serve family style - but alas, it is Friday morning and our European counterparts have squandered another opportunity to address the crisis in its true proportions and scale, thus continuing to hijack our markets.

We started out the week heading in the right direction and on script with a global equity swoon that had all the trimmings of finally forcing the ECB to open their checkbook and assume the capital responsibility only they can afford. But as the week progressed, and the markets found their footings on rumors instead of actions, they are once again vulnerable to heading back towards the edge, and likely over it after completing another trip across the range. This will inevitably draw out the time frame of the correction and kick the can down the road of the markets final price discovery. It is becoming more likely that because of the disparate European personalities and conditions, the equity markets will be susceptible to remaining within the range for longer than anticipated - or further breaking down from it altogether for a spell. If you look at the German market through the EWG you can see that it has managed to stay above the bottom of the range that was established with the opening salvo of the crisis last year. I would feel more comfortable in calling a low for the correction if the European indices broke decisively below the bottom of the range this week - similar to what occurred in the U.S. markets during the financial crisis in 2008 and 2009.

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Furthermore, after looking at the VIX earlier in the week and seeing the potential for exhaustion in volatility, I went back and took a longer perspective at how it typically trades when the equity markets make a low during the most recent bear markets.

This was actually described in an earlier note in April of this year.

In December of 2008 as the market was reflexively trading higher out of the November lows, there was a great deal of chatter by traders about "the" low being made for the cycle. And while the selling pressure was tremendous in both October and November (momentum low), and the market was up by more than 20% from the lows by the end of the year, I wanted to look for another perspective to see if there was any evidence to the contrary. I found it in the VIX while reviewing similar market environments in 2002 and 1990.

As you can see below in the charts, both bear markets found their exhaustion points at lower highs in the VIX. Considering the market back in December of 2008 was trading out of a higher VIX print in November, it constructively colored my expectations for the beginning of that year.

a Bear Market's EKG
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So for the time being, and in light of Europe's reluctance to confront the crisis head one - I have once again declared that I am, "...agnostic in the very short term, but spiritually bullish if and when the euro's grim reaper reappears."

Lest we forget that Halloween is just around the corner.

Stay frosty.



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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