Turning Points
Posted on Sunday, March 20th, 2022
It was a very stressful week here in the Reilly House. It wasn’t just the constant gyrations of the stock market. Kevin was waiting on his college acceptance decision. He applied to two schools. One was his safety school and the other was his dream school – the University of Georgia! The pressure built all week as the college was scheduled to release its decision on Friday at 4pm. Diane took Kevin and Chris to see Batman at the movie theatre just to get his mind off of it for a couple of hours. At 4 o’clock we all gathered around the computer screen to see the decision. The pressure was building. By this point he knew that his three closest friends were in. Alas, it wasn’t meant to be. No one said a word. You could have heard a pin drop. There was nothing to say. He did everything that he could. I’m so proud of him. I guess a 4.0 GPA isn’t what it used to be. Everyone has a path and they make it their own. UGA has gotten notoriously difficult to get into over the last few years but there is a path for him to get there through the transfer process. It’s been a long weekend for him but he is rebounding and looking forward to what comes next.
We started warning you about inflation before the papers and the pundits when we discussed it in our Quarterly Letter last July. We started warning you about the looming recession on the horizon several months ago. That was when the market was pricing in less than a 20% chance of a recession. That number is now up to 50%. Do I hear 100%? The various yield curves are inverting. Our choice is to follow the 2YR-10YR on the Treasury curve. Academics prefer the 3mo-10YR. There is a big difference right now as the 2/10 spread is getting razor thin but the 3mo10YR is holding in there. The recession is coming but the odd part of looking recessions is that markets tend to continue to rally – in some cases for 1-2 years. If you think about it then it makes sense. The economy is running hot and it takes time for those rate hikes to take effect and cool down inflation. As you know we have been running with this late 1960’s/early 1970’s theme for some time so let’s take a look at the 1972-73 period and the Arab Oil embargo. Sound familiar? Russian sanctions? $5 a gallon. In that time period the first rate hike took place in March of 1972. The stock market hit its local high in November of that year – another 8 months. Investors have been prepared for a selloff but the market always seeks to make a fool out of the most people that it possibly can.
This is what we had to say last week before the market rallied 5.8%! Traders and investors have been hedging their positions and taking down risk over the last few weeks. That makes sense in this environment. In sentiment surveys, for the third straight week, the bears outnumber the bulls. Positioning has been brought way down and everyone is waiting for the washout. That is exactly why the washout won’t come – yet. This is going to be an interesting week. We have the Fed making their announcement on Wednesday so investors will be waiting for that. On Friday we get Triple Witch which is the quarterly options expiration. That has been a marker of lows in the recent past. Dealers get to reset and that gives us the chance we come out of negative gamma.
The pain trade right now is higher and many will be forced to chase should it go. We will be looking to take off more risk if that is the case. There is a natural seller out there and it’s the Fed. Every time the market moves substantially higher it helps them by giving them cover to raise rates and restrict policy. There is a cap on this market.
According to our options research we have entered positive gamma again. Positive gamma is when things become less volatile and we are more apt to see a slow upward grind in the stock market. That’s the good news. The bad news is the market reset on Friday. If we can get through the next couple of days without some exogenous shock to the market we have a chance of staying in the slow grind higher of positive gamma. The end of the quarter will bring in money flows to stocks as funds rebalance and that could be a huge help. If negative gamma returns we could move much lower very quickly. Our target would be a 4000 on the S&P 500. We closed at 4463. Longer term – We still see us still stuck in the 4000-5000 range on the S&P 500 for months to come.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
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.