Return To 'Normalcy'

By: Erik Swarts | Sat, Jan 28, 2012
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I like to remind myself every now and then why the analogy has worked so well between silver and the Nasdaq market - circa 2000 and now 2001. It's not just the charts that have great similarities - it's the overarching psychology of the boom and bust cycle and the ratio contrasts to their larger sibling (gold & SPX) markets that has provided a long-term roadmap with considerable correlations. And while the charts certainly represent that emotionality in characteristics such as the parabolic tops, you can find other sentiment and behavioral comparatives in the charts.

Complete market Cycle

I believe we are currently experiencing a very close parallel to how the Nasdaq traded through the first month of January 2001, after a gut wrenching performance the previous year. Like silver, it was a slide to the lows for the Nasdaq coming into 2001. A funny thing though happened by simply crossing over into the new year. After a miserable opening session on January 2nd - the Nasdaq went on to rally more than 27% by its third week in January. Traders and Dot-com companies left for dead a few weeks back were once again resurrected believers that the correction was over and a return to "normalcy" was upon them.

Unfortunately, they were sadly mistaken.

NDX 2000/2001

SLV 2011-2012

To date, silver has corrected and retraced its losses along very similar pivots to the Nasdaq as expressed in the respective ratio charts.

NDX:SPX Ratio 2000/2001

Should the analog continue to prove prescient, February will usher in a return to normalcy, whereas silver strongly underperforms gold. Considering where the equities markets now stand and what this ratio typically implies towards the overall risk appetites for traders, the ephemeral highs now being felt by the impressions and speculation of further easing, will likely give way to another deflationary tide.

SLV:GLD Ratio 2011-2012

NASDAQ/Silver parabolic Top Study

As always, 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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