The House Always Wins

By: Erik Swarts | Tue, Dec 3, 2013
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We've held on to a few seemingly discordant ideas as the market has made its way above the Meridian and our demarkation of what's considered rational market performance. As much as we can appreciate the Tepper-esque simplicity of riding unbridled, bareback and bullish into New Year's, for better or for worst we try and keep things in perspective - even if the narratives have difficulty reconciling with each other in the short to intermediate term.

One market that we have moved our guideposts with since early fall, but one we still find historically stretched even in this environment - is in Japan with the Nikkei and the yen. From a comparative perspective, you can see in the long-term chart below that the Nikkei is sitting directly beneath overhead resistance, yet stretched at such a historic extreme that one could argue the closest market environment from a performance perspective is 1987.

Nikkei 1980-2013 Chart
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Our best guess is the Nikkei gets rejected once again for a spell before breaking free at a lower level of resistance from its epic long-term range.

Nikkei Weekly Chart 2013 versus 1987

With non-commercial speculators short the yen spiking to a fresh six year high last week, commercial traders have built their largest long position since June of 2007. Generally speaking, while day traders may win a few nice rounds at the table, the house typically get's it all back and then some.


Our Quantitative Cocktails concept was predicated on the perception of the governments ability to influence risk appetites through their respective currencies. The yen will need to make a new leg lower here for this cocktail to continue imbibing participants risk appetites higher. All things considered and now similar to the dollar in 2011 - we expect the yen to complete a test of the May low and reverse sharply higher.

Silver 2011 Weekly Chart
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Japan 2013 Weekly Chart
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2011 Silver versus 2013 Japan Weekly Chart



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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Source: The Contrarian Take