Fireworks
Posted on Sunday, June 28th, 2020
Last week we mentioned that we felt that the virus was making a comeback. The available data this week seems to bear that out. We put our money where our mouth is and decided to make some changes. Our middle son was slated to head an hour north for college in the fall but given the anxiety of Covid we have decided to have him commute for now to a campus closer to home. He will save about $10,000. (It is his money. See here – Wanna Save $100,000 on College?) He will also get to eat mom’s home cooking while avoiding what would seem to be a fertile environment for Covid in the dorms and dining hall. I think we are all a little relieved.
We mentioned last week that the options expiration in June would have the effect of unlocking the market and that volatility was on the way. Well, volatility is back as the market suffered its second down week in June.
Gaps in stock charts show violent moves. These gaps hold traders attention and become important signposts on the journey of stocks. The move lower in February was started by a gap down at the 3320 level. The gap down on June 11th at 3150 on the S&P 500 has still not been surmounted and that puts a check mark in the bear’s column. Markets stalling at resistance levels and gapping down have the bulls on the defensive.
We are not taking on additional equity exposure at this time but are certainly looking for an opportunity. Keep in mind, the central bank put is alive and well. The Federal Reserve will do whatever it takes to support this economy and market given the arrival of Covid. A market selloff based on a second wave would give them the excuse they need to provide more support. Perhaps, it will be the second mouse that gets the cheese. Pension funds and the like have not been aggressive buyers on this run up as they bet that we would test the lows. I don’t think they will let a buying opportunity slip by this time without taking much more aggressive action.
If we take out the impact of technology (QQQ up 31%) on the averages we have essentially been in a bear market since September of 2018. Since that time the S&P 500 is up 7.6% while it’s much broader based cousin the Russell 2000 is down 18.5%!! In that period gold is up 47%! We have been overweight gold and underweight stocks. Typically, bear markets last 18-24 months. We have gone sideways for 22 months and now have massive fiscal and monetary support. A selloff to fair value of 2500 on the S&P 500 would be most welcome and lead us to overweight stocks and underweight bonds.
The bears have the ball as they have now closed the S&P 500 below its 200 Day Moving Average – the demarcation line between a bull and bear market. The psychologically important 3000 level on the S&P 500 is all that holds the bears back for now. Corporate buybacks are moving into their blackout period and financial stocks failed to move higher last week signaling broader market weakness. That will only help embolden the bears. Panic from the retail day trading crowd in these thin summer markets could provide some welcome fireworks.
No blog next week as we are working on our Quarterly Letter.
Stay safe.
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.