By: Erik Swarts | Mon, Aug 13, 2012
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I continue to find the very same behavioral biases that provided prescient contrarians the initial clues (chasing the Greenspan Put - i.e. Moral Hazard) to start moving away from one asset class towards another; on the back side of the cycle - with investors that are anything but contrarian and long past prescient.

In 2000 and 2001, as the pendulum was swinging away from equities towards the safe(r) haven and sturdier shores of the commodity sector, the Fed reached for the monetary fire hose to provide both structural and psychological liquidity to a financial system under duress. And although it initially provided momentary support towards equities and the seeds for the secular bull market in commodities, stocks eventually succumbed to the path of least resistance. It was a bear market and the psychological bid of the Greenspan Put was now immaterial to the larger forces at work.

Today, we have a very similar dynamic in the now matured commodity sector with the prospect of QE and central bank interventions on the table. Whether emanating from the Fed, the ECB or the PBC - resource investors now work with a dangerous level of moral hazard in the face of reality within their respective investment theses. The general thought has been: more easing - higher commodity prices. And although this causality helped drive the dramatic returns since the fall of 2008, the several dozen easing initiatives by the world's major central banks over the past year have done very little to arrest the decline in the commodity sector that began in May of 2011.

CRB Daily Charts
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And although I have looked at the Nasdaq or the NDX (circa 2000-2002) comparative over the past year repeatedly - the shoe continues to fit in various iterations and along multiple timeframes with the resource and precious metals sector.

Risk Management
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Despite a more dramatic decline in the Nasdaq between 2000 and 2001, I believe we will see a similar pattern unfurl in the CRB as the trend continues along the path of least resistance - and as late and dogmatic investors turn from denial to fear. The immediate set-up for a turn lower is primarily based on the extreme negative relative strength and technical structure of the CRB's low in June and the very strong retracement rally that now appears to be rolling over at the 61.8% fibonacci level from the yearly low.

CRB Daily Chart

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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