Follow The Yellow Brick Road

By: Erik Swarts | Wed, Jul 9, 2014
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Over the years we've gravitated towards tracking the nuances in the precious metals sector, because they can be great leading indicators of some of the broader changes in the macro climate.


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Today, we continue to closely monitor and weigh the precious metals sector as it forges the leading path higher for the broader commodity space and corners of the market that are tangentially influenced with their respective performance and growth trends. Not surprisingly, the pivot higher in precious metals has also been marked with a trend shift north in the inflation data this year.

Throughout the year we have followed three risk ratio proxies that have illustrated the staggered start that has developed in the markets as the inflation vane has begun blowing steadily out of the south. Leading the way, the precious metals miners - relative to both spot prices and the SPX, made a cyclical low in December of last year and tested those lows coming into June. Similar to the move in silver, the subsequent rally in the miners has been explosive from their respective support zones.


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From our perspective - and as shown below in the comparative chart that illustrates the lagged, but congruent retracement folds between the miners and the broader commodity sector (relative to the SPX), the CRB has followed the leading path of the miners and appears to be testing the cycle lows from earlier in the year. Our expectations remain that commodities - led by the precious metal sector, will outperform as the third choir of inflationary hymnals finds the chorus of the move.


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Lagging even further behind, we will be keeping a keen eye on emerging market equities as the ratio roadmap would imply that an intermediate-term high approaches. While we do anticipate that risk appetites will recede in the SPX as the Fed steps further away from an extraordinarily accommodative posture, emerging markets could initially get caught up in the downturn. With that said and considering our expectations for the US dollar - we will wait to appraise the next leg before making any adjustments to the position.


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Walking just a few steps in front of the moves in commodities, long-term Treasuries appear to have completed their retracement decline. Similar to the miners in June, they have tested and bounced above the lows (relative to the SPX) from earlier in the year.


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Providing fuel for the fire - despite the trend change in inflation expectations, long-term yields continue to bleed lower against the consensus calls for higher yields and rates.


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Although the precious metals sector has strongly outperformed this year, we still consider the moves as part of a broad basing structure that has yet to release the full motivational propellent from both the currency markets and long-term yields. All things considered, those stars appear close to alignment and we remain optimistic of the sectors future potential.


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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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