AfterShocks
Posted on Sunday, April 26th, 2020
We have been preaching to all that you need to know what you own. This week was the prime example as the May Crude contract traded at a price of negative $40 a barrel. One of the most common questions that I get as an investment advisor is how do we buy crude oil? That is the domain of the futures market and, as most investors don’t realize, that is a contract market. The contract that you enter into requires that if you are holding it at expiration then you must take delivery of said commodity. Why did the contract trade negative? Novice investors did not realize that they had to take delivery. Complicating matters is the small detail of where to put all of that oil. Your swimming pool? The reason it went negative is because there was nowhere to store it. Professionals knew that and amateurs did not. A lot of money was made and lost. We suspect the oil majors were big winners.
The oil market this week was what I would term an aftershock. The great disruption of the Chinese Flu was like a massive earthquake and we are still dealing with the aftershocks – the unknown side effects of shutting down an economic system. We suspect that there are more aftershocks to come. We will be looking at Municipalities and states finances quite closely.
In conversation after conversation that I am having with serious investors’ one question seems to be focused on. Why is the market up so much, so quickly, in the face of economic devastation? The answer is systematic trading funds. For years we have remarked that systematic trading strategies drive markets and drive them to extremes. There is a feedback loop that is developed as machine generated algorithms march prices higher and lower. This bounce has seen an absence of sellers as markets hit their nadir in late March and sellers exhausted themselves. As the US government threw trillions of dollars into the system in a two week period markets found a floor. Systematic strategies hit critical levels and turned markets higher. The concept of reflexivity is alive and well.
We said last week that our focus is on tech and investor’s obsession with it. The big five stocks (Apple, Amazon, Microsoft, Face book and Google) account for 20% of the S&P 500. That is the highest concentration ever. However, the median company in that index is down 28% from its highs. When the rally is limited to only a handful of stocks it usually a sign that the rally is slipping. Markets are at key resistance points but seem to want to keep trying to go higher. It makes little sense that markets are 18% off of all time highs while facing a global depression. It makes more sense when you factor in trillions of dollars of support and a market driven by machines. Systematic strategies (the machines) are in control of the market while humans look to see if it’s safe to go outside. The humans may be forced to chase the market higher.
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
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
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.