Market Anthropology: Thinking Out Loud

Wednesday, June 29, 2011

Thinking Out Loud

If you interact with investors or money managers on a regular basis you typically get the pull-string question, “So what is your edge?” It is a valid question I suppose – considering the stakes, but I tend to almost have an involuntary grimace that would imply, “Really?”

In today’s binary trading realm of computer knows best, part of “my edge” is that I don’t operate on auto-pilot. I can think like a quant – but I don’t have to always act like one. I have free will. I recognize the algorithmic and systems presence, understand how it interacts with the markets and can put it into context in a broader sense. 

Along those lines, the macro-backdrop – which arguably has never been as crucial to get right as it is today, is the ever changing scene in which you need to juxtapose the immediate settings. It is also the well that many economists and pundits will drink from and pour tall to keep you up at night. You might hear something along these lines, which holds certain truths glazed in hyperbole: 
“You might not realize it at the time – but that snowball that started in a small municipality in Spain could eventually show up as an avalanche on your doorstep.”
With that said, Greece – and by extension Europe, was never the primary driver for my cause of concern, as noted in – Taking Shelter – at the end of April. Once the market digests the near term positives out of Greece – it still needs to get through the unwinding commodity trade and a firmer dollar. What has occurred is more than one catalyst has hit the market at the same time creating a wider and deeper effect. It is the same dynamic that I noted in my Constructive Interference Theory
When a crest of a wave meets a crest of another wave at the same point, then the crests interfere constructively and the resultant crest wave amplitude is increased. Interference (wave propagation) – Wikipedia
One of those “waves” is the commodity sector – with a focus specifically on silver. The quick takeaway was that silver was a proxy for momentum in the system – and it went parabolic. I calibrate that risk by appraising the reflexes that are most prevalent in the market and interpreting the scale through similar market environments – as in June 2006. It is a way of guesstimating where you are in the movement. Just like with the 2007 fractal study – it is a reference guide for similar trading environments. 

Interestingly, the 2006 time period is very likely the mirror (shoulder of a H&S top) of the CRB’s present trading environment as noted in my previous notes. 
And just like today – silver led the broader market lower by several sessions during its 2nd leg down. Coincidentally, the equity market is trading along very similar price points to today.
I believe once the market digests the near term positive developments out of Greece – the market will again have to deal with its own inertia – which will likely be following commodity prices such as silver and oil lower.


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(Position in UUP & SPXU)

Disclaimer: This is not investment advice. Always do your own due diligence. Erik Swarts is not a registered investment advisor. Under no circumstances should any content from this website be used or interpreted as a recommendation for any investment or trading 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.