What 'Lies' Beneath

By: Erik Swarts | Thu, Oct 13, 2011
Print Email

Although the S&P 500 made a lower low last week, a major fly in the ointment with regards to proclaiming, "Come on in - the water's fine" - is the realization that it also registered a lower low for the NYSE New Highs - New Lows calculation. And while today's market environment has been rewriting the annals of comparative data series - it would be the first time in recent market history that a major corrections final swoon was accompanied with a lower low in the NYSE - NHNL.

In tearing a page from the Keep It Simple Stupid (KISS) playbook, THE low for an equity correction was always accompanied by a higher low in the NYSE - NHNL. This point also dovetails neatly to my previous note that described THE low for a major correction was typically made with a diverging low in the VIX.

The most dangerous, although highly unlikely scenario for the bears, would be a market that bounced similar to the late 2007 tape to new highs, before promptly turning right back around and sliding lower for the next 18 months. I believe the most likely scenario would loosely follow the 2008 script - where the headline risks associated with the gauntlet of moving parts in Europe introduces another downside catalyst - sooner rather than later. To a certain degree, last weeks decline and reversal was out of step with where the Europeans are within the crisis and their own set deadline. To expect that the market finale for the correction would end so discretely and without overlap seems naive at best and reminds me of when traders were celebrating the 20% rise in the SPX from the lows in December of 2008 - before the details of resolving our own banking crisis were enumerated by the Fed and Treasury.

In light of these observations, I am expecting the SPX to diverge in the next several weeks with the EKG of a Crash analog - as the market comes to terms with the continuing kinetics out of Europe and what that will mean towards price discovery.

As always - stay frosty.

2011 NYSE New Highs - New Lows & SPX
Larger Image

2008 NYSE New Highs - New Lows & SPX
Larger Image

2000-2003 NYSE New Higs - New Lows & SPX
Larger Image

2007/2008 NYSE New Highs - New Lows & SPX
Larger Image

1998 NYSE New Highs - New Lows & SPX
Larger Image



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.

Copyright © 2011-2016 Erik Swarts

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com