Market Anthropology: Appraising Risk

Tuesday, June 7, 2011

Appraising Risk

Because I focus on characterizing the broader markets themselves, I search for eclectic reference anomalies to assess their relative health. And because I don’t feel the need to shell out $1500 a month to utilize a Bloomberg terminal (as wonderful as they are) – I rely on my own resourcefulness to accommodate my simplistic research needs. 

One such tool has been to keep an eye on a position like FCT. FCT is a close ended fixed income mutual fund that primarily invests in senior floating rate loans made to mid tier corporate borrowers. Its utility on my screen has been to appraise credit risk sensitivity. And while we know corporations have been drinking profusely from Bernanke’s more than accommodative monetary trough – it still warrants watching how the instrument trades relative to its past price action. In the past when FCT hits an air pocket in the credit or interest rate markets and collapses, it almost always precedes a sharp reversal lower in the equity markets. I utilize a stochastic oscillator in the charts to color the relative degree of the approaching equity market weakness. Namely, if the oscillator collapses suddenly after trending above the top rail it usually translates into a sharp stock market correction that is likely bought heavily once the market bottoms. If FCT slowly bleeds lower it typically translates into a longer bout of equity weakness. 

If this anomaly proves relevant, what we have today appears to be the former as indicated in the momentum metrics. It’s interesting to see the VIX also translating lower (over the past year) as it did in the early part of 2007. At the moment (12:00 noon est.), FCT is bleeding lower once again as the market bounces from its oversold condition. 

I strongly suspect the equity markets will follow suit – and perhaps in a rather cascading fashion. Should that occur, the VIX will likely trade as it did in late February of 2007.  

The associated metrics (RSI, CCI, Stoch) are describing FCT only. 

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(Positions in UUP, & VXX)

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.