Saturday, January 28, 2012

Return To "Normalcy"

I like to remind myself every now and then why the analogy has worked so well between silver and the Nasdaq market - circa 2000 and now 2001. It's not just the charts that have great similarities - it's the overarching psychology of the boom and bust cycle and the ratio contrasts to their larger sibling (gold & SPX) markets that has provided a long-term roadmap with considerable correlations. And while the charts certainly represent that emotionality in characteristics such as the parabolic tops, you can find other sentiment and behavioral comparatives in the charts. 

I believe we are currently experiencing a very close parallel to how the Nasdaq traded through the first month of January 2001, after a gut wrenching performance the previous year. Like silver, it was a slide to the lows for the Nasdaq coming into 2001. A funny thing happened though by simply crossing over into the new year. After a miserable opening session on January 2nd - the Nasdaq went on to rally more than 27% by its third week in January. Traders and Dot-com companies left for dead a few weeks back were once again resurrected believers that the correction was over and a return to "normalcy" was upon them. 

Unfortunately, they were sadly mistaken. 
To date, silver has corrected and retraced its losses along very similar pivots to the Nasdaq as expressed in the respective ratio charts.  
Should the analog continue to prove prescient, February will usher in a return to normalcy, whereas silver strongly underperforms gold. Considering where the equities markets now stand and what this ratio typically implies towards the overall risk appetites for traders, the ephemeral highs now being felt by the impressions and speculation of further easing, will likely give way to another deflationary tide. 
As always, stay frosty.