Back to Normal?
Posted on Sunday, May 3rd, 2020
I believe that man will not merely endure: he will prevail. He is immortal, not because he alone among creatures has an inexhaustible voice, but because he has a soul, a spirit capable of compassion and sacrifice and endurance. William Faulkner
The Governor of Georgia lifted our stay at home order on Friday. As I suspected most people waited out Friday to see how things went but by Sunday it felt like things were back to normal. If you were wondering if people are going to go right back about their business I think today was an interesting start. Let’s see if it shows up in the data.
The question keeps coming as investors ask why is the market up so much? The market is up due to systematic strategies that produce wave after wave of computer generated buy orders seeking to front run other investors. We think that this flow may be exacerbated by the thousands of unemployed who are at home day trading and feeding this drive by computer generated algorithms to push ever higher. Those systematic strategies flipped from short to long early last week. Late in the week they had a reversal of fortune and flipped from long to short putting pressure on the market.
We have said that humans have not been the drivers of this rally – machines have. Take a look at Warren Buffett. Markets are off 30% from their lows and the world’s greatest investor has been a net seller! In his webcast this weekend he noted that he has sold ALL of his airline stock and not bought much of anything else. He is sitting on over $150B in cash. To be fair Uncle Warren has hated airline stocks since he lost millions while investing in US Air years ago. I was surprised when he bought in again over the last few years as he had sworn off airline stocks forever so his sales don’t come as a big shock. It is somewhat shocking that he didn’t make any purchases but his companies are very tied to the US economy. That fact alone may have him wanting to hold more dry powder than normal. Let’s not read too much into his reluctance to part with cash.
We see a retracement of this rally as the machines get short and humans have gotten out of the way for now. Uncle Warren is not the only one to have not bought the selloff. The selloff was so fast and so steep that professional investors were net sellers. Given the opportunity they won’t do that again. One thing that investors look for in this business is positive divergence. If we reach the previous lows the numbers will not be as severe as the massive selloff in March. The positive divergence and consumers headed back out to stores will help investors gain confidence – that and the trillions of dollars the Fed has printed.
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.