Thursday, December 20, 2012

When Denial – Turns to Fear

A few thoughts on silver – as the sector continues to flush. These charts were prepared last night, hence, they do not reflect today’s large decline. 
As of this morning, silver has broken the early November lows – completing the equal retracement move of this leg of the 91′ Nikkei comparative. 
However, as you can see in the comparison of price structures below, silver is still considerably higher than the lows put in this past June, when I initially introduced the comparison in the Trilogy  and recommended precious metals as a perspective long trade.  As of this morning, the trend support from late June – which one could argue represents the psychological threshold of denial – has been broken. 
Because silver and its less emotional cousin – gold, had not confronted their more existential issues of purpose and value earlier,  an upstream comparative to the Nikkei may be more appropriate through this window.   

With that said, sentiment has eroded considerably as the market has grounded lower over the past several weeks, so – Stay Frosty

Thursday, April 24, 2014

What’s Up With Silver & Gold?

Anecdotally, we are seeing and hearing from those anxiously long the precious metals sector and contentiously short. With gold and silver down sharply in the early morning session – then reversing violently higher, the emotional spectrum in the market is likely diverged at or near another extreme. Over the past 10 months, both bulls and bears alike have been waiting for the next leg to commence. Instead, the market has played the jester – traversing a narrowing range and taking turns at frustrating both sides. 

When will the argument resolve itself ? 

Although it’s felt like a standing room only performance of Waiting For Godot, we expect long-term yields still hold the key to the next chapter for precious metals and the broader market story. We continue to view the move in 10-year yields as historically stretched to a relative extreme (see chart), a notion apparently lost on many participants as the Fed tapers their way to the end of QE and through an esoteric Fed cycle. 

Just this week we saw that a Bloomberg survey of 67 economists unanimously expected 10-year yields to rise over the next six months (see Here). From a contrarian point-of-view, this should wake up participants that underlying sentiment is dangerously listing towards one side and the downstream and kinetic effects could be severe in many markets. The ratio chart below depicts the relationship between gold and 10-year yields, which as we noted last December had also reached a historic extreme. If and when long-term yields breakdown, we suspect a much stronger tailwind to develop behind precious metals.

We incorporate comparative analysis into our research because it provides a historic context of where a market may sit in its respective cycle. In essence – and as past is prologue, does risk now favor the short side or long? We often appraise and contrast an asset by normalizing a specific window in varying timeframes – based on either momentum, proportion or seasonality. The research provides a reference perspective, based on big picture asset trends and a strong belief that market psychology and performance cycle and structure themselves along a defined continuum of exuberance and despair. Like most behavioral analysis, it is both art and science – qualitative and quantitative. 

The series of charts below present a performance and seasonal study of four overlapping asset cycles that boomed, busted then bounced with very close seasonal tendencies. While we have often defined a study by its respective momentum or cycle low and highs, for this series we just looked at performance that was normalized to a specific duration. You will notice that as one cycle was breaking down – another was beginning its summit approach. While there have been many through the years, we chose the Nikkei, Nasdaq, silver and biotech – because their story lines now overlap and the seasonal tendencies are so similar.

As the Nikkei was breaking down at the start of the 1990’s, risk appetites changed and developed a palette for the Nasdaq. After the Nasdaq cracked going through the Millennium, investors turned to precious metals. The cycle can also come full circle, as we believe the performance and seasonal presentments of the current risk du jour describes. As the biotech index now turns down just past its zenith, we expect silver and the precious metals sector to begin making their way materially out of the trough they have trended towards over the past three years. 

We have followed the structural, momentum and performance similarities of the Nikkei and Nasdaq busts quite closely over the past three years. Although we’ve needed to adapt to current market conditions, both historic markets have greatly helped us navigate precious metals through the top, middle and now bottom parts of the cycle. While our legs are admittedly tired of watching for the next turn, the historical perspective has provided us with a patient and even keel.    

Over the past few months, the silver:gold ratio has diverged from the comparative profile with the historic NDX:SPX ratio. While it’s something that we are keeping an eye on, momentum appears tightly coiled and presented with pronounced positive divergences as the ratio tests last summer’s low and looks to converge with the NDX:SPX ratio. If today’s early action is any indication, the support appears strong. Moreover, silver miners are still outperforming their gold counterparts – which have been leading spot prices in the yellow relic higher.    

Thursday, July 6, 2017

What’s “Up” With Gold?

The dollar continues to weaken, yet gold finds no incentive to rally. 
What gives?
Fundamentally, in the basic real yield equation (nominal yields less inflation) – that arguably is the main long-term driver of the price of gold, the year-over-year inflation figures have underwhelmed of late. 
This is primarily because despite breaking down again from the highs last December, on a year-over-year performance basis the dollar has actually trended higher, essentially arresting the respective moves of higher inflation and lower real yields that began in the back half of 2015 – and which led the cyclical pivot higher in gold in late December of that year. 

Big-picture-wise, the dollar has remained largely range bound over the past 2½ years. However, it’s the dollar’s relative performance (YOY) trend that has wagged inflation and the direction of real yields. Until the dollar can break below the lows of last summer and fracture the very broad top that’s extended the range since 2015, both gold and the prospects for higher inflation/lower real yields will remain range bound as well. This perspective also applies to the numerating side of the real yield equation, as long-term yields – despite weakening again this year, are significantly higher than where they were a year before. 
That said, the positive long-term development for gold is that although prices have recently been impacted by more hawkish policy expectations abroad – dragging US nominal and real yields higher, the dollar index has taken the next step lower beneath last November’s ephemeral post election breakout, with long-term support extending from the over  year range directly below. 

Our expectations remain that the cyclical bull market in the dollar is over, and a breakdown below long-term support will rejuvenate the move higher in gold – as well as the next leg lower in real yields. From our perspective, it is the dollar’s relative historic extreme that presents the largest catalyst for a continued move lower in real yields and a resumption of the bull market in gold. 
The US dollar index continues to mimic gold’s pattern breakdown from it’s broad top carved across Q2 2011 to Q1 2013. Although gold will likely remain range bound this summer until long-term support is broken in the dollar, we’d speculate that as the dollar makes its way back to the lows from last summer, gold will regain a foothold as the retracement rally in yields also runs its course. 

Tuesday, September 19, 2017

What Happens When Inflation Walks In?

If you watch and participate in markets long enough – and no, we’re not talking about, “On a long enough timeline…” – you’ll appreciate or get bitten (as we certainly have from time to time) by the sardonic irony that often becomes exposed by a market’s cycle. Consider Mohamed El-Erian’s “New Normal” market strategy that aimed at the start of this decade to capture the anticipated outperformance of emerging over developed markets. Bear in mind that the phrase has stuck around since then, despite the fact that it was largely a narrative for a poor investment strategy.
What happened? El-Erian and Gross were prescient in inventing the term “new normal” to describe a very slow-growing global economy with heightened risks of recession, as befell much of Europe. But they were dead wrong in predicting that emerging markets would provide outsize stock returns, and they were wildly off base in their notion that developed-market stock returns would be deeply depressed. Emerging market stocks have stumbled since 2011, and emerging market bonds have lost ground this year. Meanwhile, developed-world stock markets have soared. The fund’s use of options and other techniques to hedge against “tail risk”—which essentially means insuring against extremely bad markets—has also surely cost the fund a little in performance. – Kiplinger, November 14, 2013
Not to overly pick on El-Erian here, who is typically a very thoughtful and creative macro thinker – not to mention many of his new normal predictions did prove prescient, with the very large exception of rising inflation that would have likely driven a successful investment strategy – not just a convenient catch phrase… but, ironically, it appears his timing earlier this year of calling for an end of the new normal, as selectively revisionist as they paint it, might provide a fitting bookend to the market’s wry sense of humor.
Eight years later – and instead of just getting slow growth right in a developed economy like the US, as he initially suggested in May 2009, his other two major tenets of rising inflation and rising unemployment might eventually be realized domestically in the economy’s next chapter. In fact, from our perspective it seems more likely than not.
In theory, markets should be easier to game. They’re expressed in broad sweeping moves with pronounced peaks and valleys that on paper – and in hindsight, present clear transitional signals. Buy here, sell there – what’s the big deal? The problem, however, is that timing the transitions, which are driven by inherent human behaviors, prove exceptionally challenging, especially over the short to intermediate-term and when the largest central banks are intervening in the markets on a massive global scale.
For as long as markets have functioned broadly, participants have attempted to place a quantitative framework around and over them to better understand, describe and hopefully exploit their machinations. And while it does provide some context, ultimately, they’re still driven by behavioral incentive that might best be described as non-linear and reflexive across shorter timeframes that more or less eventually conform with general equilibrium theory. The paradox is holding both the quantitative and qualitative schools of reason in mind and existing in a space seemingly governed by both free will and determinism. That said, if we weren’t wired this way, capitalism wouldn’t function as a one-way street for long (e.g. see communism). Icarus eventually flies too close to the sun, and in this alternate parable, Godot – i.e. inflation – surprises everyone and shows up.
As we alluded to in our note last month (see Here), it was a good bet that the inflation data was due to turn up again, as US dollar strength (on a year-over-year performance basis) had run its course in May. We’ve pointed out over the years that the YOY performance of the dollar has led the inflation data and we’ve closely followed the rollover in real yields (here the 10-year less CPI) since 2015, as it has positively correlated with the YOY performance of the dollar. Last week’s CPI data confirmed the expected turn, with headline CPI coming in at 1.9 percent YOY, modestly higher than the median forecast of 1.8 percent YOY for August.

So where does that leaves us going forward? Extrapolating the downtrend and YOY performance in the dollar this year, the inflation data should continue to firm in September. Moreover, the very broad 3-year top in the US dollar index has recently broken down below long-term support, which we’ve approached as a major fulcrum for the next legs in inflation (we believe higher) and real yields (lower).
Looking back at history and distilling the last time real yields had rolled over within a negative band (mid 1970’s and mid 1940’s), a pulse of inflation eventually outstrips growth, leading to a sharp spike lower in real yields. From our perspective, it is the dollar’s relative historic extreme today and the Fed’s relative constraint with raising rates that presents the largest catalyst for a continued decline in real yields. While there are some similarities with the 1970’s through the prism of real yields, there’s still greater overlap – in our opinion, with the 1940’s when the Fed and Treasury were last involved in a large-scale asset purchase program and yields were troughing within the secular long-term cycle.

Although the equity markets here in the US have continued to defy gravity, we suspect similar to the completion of the cyclical bull market of the mid 1940’s, its fate will be sealed when realized inflation surprises to the upside and greater uncertainty prevails with future Fed policy. Considering the recent breakdown in the dollar, Godot could show up this fall. That said, we believe the mid-to-late 1940’s still offer some behavioral perspective with the markets today, as investors – despite quickly shunning equities, did not broadly sell Treasuries in fear of inflation.
As mentioned in previous notes, in Milton Friedman and Anna Schwartz’s – A Monetary History of the United States, the market climate in the 1940’s was described as being so suspect of the Fed and Treasury’s visible hand, that even after a 150 percent rally in the equity markets that began in 1942 – went through a recession in 1945 and exhausted around Memorial Day in 1946, participants by and large didn’t trust the market or expect inflation to rise as precipitously as it did from the trough going into 1947 and 1948.
“Despite the extent to which the public and government officials were exercised about inflation, the public acted from 1946 to 1948 as if it expected deflation.”  
“… An important piece of evidence in support of this view is the harbinger of yields on common stocks by comparison with bond yields. A shift in widely-held expectations toward a belief that prices are destined to rise more rapidly will tend to produce a jail in stock yields relative to bond yields because of the hedge which stocks provide against inflation. That was precisely what happened from 1950 to 1951 and again from 1955 to 1957. A shift in widely-held expectations toward a belief that prices are destined to fall instead of rise or to fall more sharply will tend to have the opposite effect – which is precisely what happened from 1946 to 1948.” – Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1963

Consequently, we continue to like the long-term prospects for gold, as it has displayed a strong inverse correlation with real yields and should also benefit from the prospective safe-haven demand generated by the eventual cyclical decline in equities. All things considered, when Godot walks in – you best be wearing some. 

Thursday, November 17, 2011

We’re getting nothing for XMAS

As I have mentioned previously in my earlier notes, bear markets typically finds “The” low with a lower VIX print. Considering the market has traded on a similar arc as the 2008/2009 bear – albeit swifter and shallower – you can use the VIX map from that time period as a loose guide for estimating when volatility and price might exhaust themselves. 

For those expecting Santa to arrive early this year, I can’t help but think of this familiar song.

Wednesday, August 31, 2011

Welcome To The Rodeo

Anyone that swims in the market knows that there is always a danger in bringing too much dogma to the table. Anyone that trades with very short time frames knows that it actually does not even belong at the table. You trade what you see – not what you expect should happen. 

But like everything else in life, there are exceptions to the rules and I have been making them on a regular basis for the last six months. 


Because the market telegraphed an increased in difficulty and started throwing trap doors on a regular basis. We entered the rodeo stage where you are either thrown off the bull and bled by a thousand cuts, a few deep cuts – or proactively anticipate the beast that is actively trying to keep you off balance and vulnerable to fall. 

Here is another indicator that may color expectations with regards to those trap doors. 

The chart below is of the McClellan Oscillator, which gives an indication of breadth. In essence, it is derived from advancing issues less the number of declining issues and presented as a ratio. 

From StockCharts:
Think of the McClellan Oscillator as the MACD for the AD line, which is a cumulative measure of net advances. Just as MACD puts momentum into the price plot of a stock, the McClellan Oscillator puts momentum into the AD line.
To oversimplify the interpretation here for the current market, if the NYMO breaks through the previous high established on July 1st – there is a good chance that the market will at the very least give you an opportunity to sell at new highs. If the NYMO diverges from the July 1st high, it is a strike against the market and opens the late 2007/2008 comparisons where breadth continued to diverged from price. What the market has going for it here is the very short time window since the previous high. An eclipse of that level (granted – quite extreme +89) would be a step in the right direction. 
I included (once again) the market environment from 2007 – the last time traders navigated a bullish gauntlet of trap doors and surprises. 

Friday, October 25, 2013

Waterfalls of Australia

In our note last week we had cautioned that the Australian dollar was approaching a prospective interim high – when viewed through its 2008/2009 market profile. Over the winter, we had relied on this same historic market environment for comparative reads, while various commodities and their corresponding currencies were working themselves towards what we had expected would be another significant and disorderly unwind. 

Silver, gold, the euro and the Aussie were all viewed as probable barrel candidates for another run over the edge. 

“As we cautioned on Tuesday, the risk continuum in this environment extends beyond normal distribution; i.e. – those looking at mean reversion strategies, either from an oversold price or sentiment perspective – may find themselves in a barrel cascading over the edge. 

… Although the euro continues to follow the structure and momentum unwind of the Mirrored Pivot comparative (for an explanation, see Here) – the kinetic potential across the hard commodity-scape appears to be of the 2008 variety. In either case, we expect the next phase of the decline to become more disorderly on the downside.” The Cascades 3/2/13


A few months later, three of the four candidates had made their way over the brink and into the plungpool at the bottom of the falls. While the euro did weaken into the spring, its notable resilience was one of the first indications to us that the over two year old meandering and turbulent commodity unwind was likely approaching its delta. 

  • Thoughts on the Aussie today and a few of its intermarket relationships:

Longer-term, an upside bias sits with the bulls. 

Although the divergent momentum structure and timeframe of the two declines have pivoted across similar durations, this years scarped cascade was less than half the size witnessed in 2008. 

Because of this, we also show in the lower right chart the 2008 final wave structure/fractal and retracement bounce fitted to this years shallower move. Both structures pivoted directly at the 50% retracement level.  

– Click to enlarge images –

Worth mentioning was silver’s notable and uncorrelated strength it exhibited during the Aussie’s retracement decline that began in January 2009. As we alluded to last week, we would expect the precious metals sector in the current market environment to run with the yen for a spell as the equity markets have trended with the Aussie. 

Over the past week the performance of emerging markets relative to the SPX has rolled over. Our expectations are that emerging markets are leading the moves here and should also lead out of another prospective low. 

The “digital signal” between silver and the Aussie was dropped. It appears the Aussie just found silver’s old analog highs from late August. 
1:45 EST – Weekly Postscript:

The long and short of things: despite the equity markets progression towards its strongest positive seasonal bias (Nov-Jan), we’ve highlighted this week a few hurdles the markets need to overcome in the short-term to extend their gains. 

Signs of the Times – points towards a rest and consolidation for the Nasdaq through November.

Hard to Compre-Yen-d – sees turbulence on the horizon in Japan through the yen into November.

Today’s note – illustrates a prospective retracement decline for the Australian dollar, which taken in context with a strengthening yen would further add to market pressures as carry trades were quickly unwound. 

Tuesday, July 19, 2011

War Is Hell

It only took two months for the memories to fade. Or perhaps it was just too painful to confront. Trauma works in mysterious ways, especially if the victim believed so fervently in the aggressor. I can’t say I haven’t been there myself – we all have.

In any case – the silver bulls are back in town and they have ample causation to draw from. Whether it is the end of Europe, the end of America, the end of China, the end of the shorts or the end of Rupert – the world is their oyster and they intend to enjoy their second romp around the block. Heck, in the last week alone the white metal rose ~16% from low to high across just 5 sessions. Not bad work if you can get it. 

For the manipulation conspiracy theorists – the recent COT reports indicating a very low short ratio  could be the final ingredient to unleashing the true value of silver. That may very well be the case, and it has typically been quite constructive to the market during a healthy bull – but let’s just consider for arguments sake another perspective from the conventional wisdom. 

The bull is sick.

Last time I checked (and experienced in 2008), a market without an active and participating short component (even if its manipulative), leaves it extremely vulnerable to a degree of downside risk that may not be readily apparent (i.e. systemic risk). Especially if a large concentration of the market now trades for the first time in history in an even more liquid form – such as an ETF. Commodity markets have never experienced a “hit the bid” type moment (without a robust short community to govern the decline) that the precious metals markets will likely experience. The constructive interference delivered by portfolio insurance in the 1987 equity market crash comes to mind. 

With that said, here is the 2008 analog that the market has loosely been following both from a seasonal and price perspective. 
As apparent in the fibonacci retracement series – you can see that the current market environment has rebounded with shallower proportions as compared to 2008. 
In 2008, the initial bounce retraced 50% of the downside move. It would eventually retrace 61.8% before making its way over the ledge around 16. The current market has only retraced 38.2% of the move during the initial two bounces. If the market remains consistent with its proportions – and as indicated in the degree of relative strength exhibited yesterday, the 50% fibonacci level may prove to be a very tough level to overcome. 

With that said, I am biased as an infantryman in battle here – just as the other side makes their way across the field. 

“I’ve been where you are now and I know just how you feel. It’s entirely natural that there should beat in the breast of every one of you a hope and desire that some day you can use the skill you have acquired here.
Suppress it! You don’t know the horrible aspects of war. I’ve been through two wars and I know. I’ve seen cities and homes in ashes. I’ve seen thousands of men lying on the ground, their dead faces looking up at the skies. I tell you, war is Hell!” – William Tecumseh Sherman


I just joined Twitter. All my active trades and occasional market musings are disclosed in real-time here

(Position in UUP, ZSL, GLL)

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. 

Tuesday, April 26, 2011

Waiting on a Train

Cut your losses quickly.

As a trader, you hear it as often as, “Have a nice day.”

The problem with these axioms is that they are generalizations towards a discipline that in many cases is antithetical to stereotypes. I wholeheartedly agree, it is prudent advice to follow in a typical continuation or trading range environment.  However, when it comes to extreme market behavior, there is an exception to the rule. 
  • It’s Always Darkest Before The Dawn
By late January of 2009, the equity markets were about as psychologically bludgeoned as a market could sustain. The financial index (BKX) had loss over 70% of its 2007 market capitalization and the media was debating the merits of a broad nationalization of the banking sector. Nouriel Roubini was sharing a table at Nobu with Brangelina and ZeroHedge’s byline of “on a long enough timeline, the survival rate for everyone drops to zero” was about to be penned at the market bottom.

It was dark out there – real dark. 

And yet, we should have all bought more.  

I started accumulating a position on the long side in the financial sector in late January after the BKX liquidated over 20% on one Monday morning session alone. And while the position became almost immediately underwater in a matter of days – I had done my research (a snipit of it here and here), believed in the trade’s thesis and waited for the stars to align. 

The trade took about one month to materialize. 

Because I was utilizing leveraged ETFs to commit the trade, the initial position would lose roughly a third of its intrinsic value. However, by layering equal positions into the trade, my cost basis was eventually within a few percent of the market low that March.

A few months later the aggregate position had more than tripled. 

I had traded the initial position’s intrinsic value for time. Time would be the great revalator once again. 
  • The Exception To The Rule 

Buying and selling into a market extreme is one of the few occasions where dexterity doesn’t count for much. Caveat being, as long as you are operating without extraneous margin on your position, have done your research and know which side of the tracks to wait for the oncoming train. This kind of trading strategy only works during major market inflection points where it pays to be aggressive and buy fear. 

The angle of incidence will equal the angle of reflection. 

However, if you have misread the tea leaves of continuation for exhaustion – then it’s just magnified pain and in hindsight – reckless. It is a high risk, high reward trading strategy. 

The comparison of my financial sector washout trade in 2009 and silver today (see here), seems appropriate because they both display(ed) all of the characteristics of extreme price action. In late January of 2009 it was a waterfall bottom. Today in silver it’s a parabolic top. They are both artifacts of exhaustion in the tape. The Ying and Yang of disequilibrium. They are not discrete patterns to notice. 

Leverage ETFs should only be utilized by professional traders. In the right desensitized hands they are outstanding tools for capturing a trading thesis over the near to intermediate terms. Many traders bleed themselves to death and second guess their research by entering and exiting a trade several times before the market turns. It can be death by a thousand cuts and quite confusing to navigate.

In a trading and media environment that is so heavily dominated by the approach of high frequency trading, “cut your losses quickly” can at times preclude you from missing the train entirely. It is often prudent advice to follow in the typical continuation or trading range environment.

However, when it comes to extreme market action, there is an exception to the rule. 

I have heard on numerous occasions over the past week traders comparing a silver short in todays market as “picking up nickels in front of a bulldozer.” 

That analogy does not seem appropriate to me, because I am not trying to pick up nickels – I am trying to pick up silver dollars. 

Perspective is everything. 

I just joined Twitter, you can find me here

Disclaimer: This is not investment advice. Always do your own due diligence and research. 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.

Wednesday, December 9, 2015

Waiting on Santa

Gimbal’s Manager: “Ok people – tomorrow morning, 10 A.M., Santa’s coming to town!”  

Buddy: Santa! Oh, my god! Santa here? I know him! I know him! – Elf 

The SPX analog that we mentioned a few weeks back, continues to hold congruence with the closing weeks of 2011. With the SPX achieving a lower low in Wednesday’s session, the comparative window for the much heralded Santa Rally would open tomorrow. 

Considering the timing with next weeks Fed meeting and greater clarity with posture and policy, a bullish outcome over the near-term would certainly not be out of the question in equities.