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Have No Fear

By: Erik Swarts | Monday, November 26, 2012

"If you are out to describe the truth, leave elegance to the tailor." ~ Albert Einstein

As an independent trader, I begin each week by closely monitoring the underlying fundamentals of both the financial markets and the global economy. Where my research typically diverges from convention is when I then take that same top-down approach and apply a synthesis of pattern recognitions to isolate and scale historically similar price and momentum environments. Not surprisingly, although the catalysts and motivators between comparisons are more than likely dissimilar, the market reactions to various hopes and fears is quite repetitive. It is this self similarity and scale invariance of traders emotions that is presented within the charts, that can become a powerful intuitive edge to work and contrast from. It is by no means a certainty of future market expectations, but as I have presented over the past two years - a compelling analytical perspective to incorporate.

Top Spotting - 2007 SPX 2012 NDX
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With that said, and in light of the SPX/NDX's acute prescience over the past month, I added greater contrast with respect to the indexes performance, as well as a comparative between volatility - as measured by the VIX for the 2007 SPX and the VXN for today's NDX.

As presented below in a daily series, both indexes have performed very closely over the given time-frames. However, the current market has expressed considerably less concern/fear when viewed through the VIX/VXN - than compared to the initial correction in November 2007. Although the VIX/VXN can be a more nuanced instrument(s) for comparison than price and momentum, considering the backdrops of the Fiscal Cliff, the ongoing issues in Europe and the slowdown in China - it is surprising how low the VXN, and tangentially the current VIX - is today.

In light of the ongoing issues the market has absorbed to-date, one could make the argument that courtesy of the perceived safety nets extended by our monetary handlers both here and abroad - participants have become far too complacent and desensitized to risks - as obvious as they may be.

Top Spotting - 2007 SPX 2012 NDX
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But have no fear, should the equity markets once again loose their footings, it is my suspicion that the negative divergence in price and complacency will likely resolve itself both swiftly and violently. For this reason, as well as my comparative work with the US dollar index and the Aussie - I am cautious going into this week after the market hit my initial target of 2640 on Friday.

As always - Stay Frosty.

 

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 © 2011-2014 Erik Swarts