30 Second Timeout

Posted on Sunday, February 21st, 2016

Investors are breathing a sigh of relief as the S&P 500 has bounced 5.9% off the lows of 2016. It was almost as if a starter’s gun was fired the morning after New Year’s 2016 and investors have been racing ever since. Now, investors have been granted a 30 second timeout to catch their collective breath. It might be time to get back on the court.

The S&P 500 closed Friday at the 1917 level. The bears will look to stop the bulls advance at first 1940 and then 2000. The S&P has returned to the 1812 level several times now and that is the space that bulls must defend. Technical analysts are calling attention to that level as any breech of 1812 could propel markets lower. As the price of oil continues to stay below $40 more and more pressure will be brought to bear on oil companies to pay back debt and there will be pressure as well on the banks that hold that debt. Round and round she goes as negative pressure begets increased negative pressure and lower prices beget lower prices. Those forced to sell will be selling into a spiraling lower price and be forced to sell more assets to raise capital. For now, the risks still seem to be leaning to the downside. Credit risk is rising.

We are seeing investors fleeing stocks and moving into safe haven assets such as US Treasuries, Utilities, Municipal bonds and Gold. Jeffrey Gundlach, the current Bond King, has been prescient in his market call of late and has stated that Muni bonds may in fact be overbought at this time. It shows the level of fear that investors have gotten themselves to. We are also seeing investors raise cash positions to levels not seen in years. We think that those are good signs. The fact that investors have sought and are seeking shelter will provide some cushion to any market tumble. Markets are preparing for another 2008 style crash. That, in essence, is why 2016 is NOT 2008.

We have been underweight equity allocations and heavily overweight cash.  We have also been using volatility as a hedge this year and that has worked out quite nicely. We sold our hedges as stocks bounced off of their more recent lows and are currently un-hedged (other than cash positions) but that could change at any time. Hedging is like insurance. It costs money but you will appreciate having it if the house burns to the ground. It sounds easy and without risk but it is not and the use of hedges must be done judiciously. Tactically applying portfolio hedges at the appropriate times will allow us to outperform in a down market.

Remember, markets go down far faster than they go up. We are not making predictions here. Investing is not a game of perfect.  It is a game of probabilities. Keep an eye on gold. Foreign investors could find solace here as the games of currency wars and negative interest rates heat up.

 

 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.