Let’s Be Careful Out There
Posted on Sunday, January 27th, 2019
We were very surprised at the lack of volatility last week given the sheer volume of news. The biggest news may have come on Friday in the form of an article from the Wall Street Journal. In it, the authors made the point of saying that the Fed may reach its destination on the shrinking balance sheet sooner than expected. As you know, our thesis about the market relies heavily on central bank policy and if the Fed were to stop sooner than expected it would be a win for the bulls.
The bulls and the bears didn’t even show up last week as the averages barely budged closing at 2664 on the S&P 500. (Maybe they were shutdown as well.) The 2664 level on the S&P 500 is exactly 4x the 666 level on the S&P – a level we have told you we would struggle with for 9-18 months. Add one more week. Gold and precious metals had a great week as the US Dollar fell. We see more weakness for the almighty dollar ahead which should continue to support precious metals and the commodity complex as well as emerging markets.
Being able to hold these gains in the market for another week gives the edge to the bulls. It seems as though money has been flowing as central banks balance sheets have grown larger since mid December. China and Europe seem to be adding while the US is making soothing comments to markets about its flow hence the huge rally since Christmas. That gives power to the bulls.
For the most part, we still hold the same view as last week. That is, unless, central banks begin to change their tune. This is what we had to say last week.
We still think that there is a decent probability that the market runs back into the 2800 level on the S&P 500 before turning lower. The trend following funds will flip from short to long spurring the market higher. Hang on. 2740 may bring out big buyers according to Nomura Securities research. We were fortunate to have bought a decent percentage on Christmas Eve increasing our equity exposure. We sold most of that this week. We think that the market runs into the 2800 level but aren’t sticking around to find out. We lowered equity exposure this week and may look to lower it further if the trend following funds push the market too high.
Markets are funny. We can go weeks with a trend and then it turns in a day. Investing is kind of like working as a policeman on a stakeout -long periods of boredom punctuated by moments of sheer terror. In investing, most of the money is made in the waiting. The turning points come infrequently but take long periods of research and anticipation as we seek to make the right moves.
Market history suggests that a retest of the Christmas Eve lows is preferred to show real concrete support in this market. Valuations are still historically high and markets are overbought. While market history tells us that markets should move lower, markets have a way of surprising us all. If central bankers keep pumping money into the system markets may just continue to rally. Let’s be careful out there.
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.