Time Heals

Posted on Sunday, July 17th, 2022

My youngest son had his wisdom teeth extracted this past week. Two of them were twisted and, in addition, he needed a bone graft. Sounds as painful as it looked. I have had all sorts of surgeries and injuries. In my opinion, the worst are ones in the head and neck region. They just seem so much harder to deal with psychologically. You cannot get away from the pain. The week went by with a lot of complaints but without incident and lots of mashed potatoes. All he needed was some time to heal. With age and experience we know that time heals all wounds.

As for the market the first two weeks of July are historically the most profitable two weeks of the year. At least the bulls can champion a small win for 2022 as July has started off higher. Not a massive win for the bulls but a step in the right direction. Positioning is light so there is not a lot of credence being put in market moves as the restaurants in the Hamptons and beaches are packed. Try to ignore its crazy summer movements.

Sentiment is stretched to the downside as the reliable Bank of America Bull/Bear Indicator has been stuck at zero for weeks – an indication of a buying opportunity. Investors refuse to bite for two reasons. One – it is the summer and who wants to commit capital when volume is so light. The second reason is that everyone believes we are on the cusp of a recession and that markets need to go down another 10-20%.

Everyone knows the recession is coming. It was the talk of the town this weekend at dinner and the golf club. Everyone thinks that the market will go down to 3000-3600 on the S&P 500. Why doesn’t the selloff come? Everyone is looking thru the mountain. The expectation is that the Fed raises rates until they start lowering them. Why sell? It always goes right back up. Right? Right?

Everyone is recognizing the looming recession. I see a recession looming but with a strong jobs market. What does that mean for markets? I see underweight investors and, most critically, systematic strategies positioned for a fall in equities. If that fall does not come these computerized strategies will be forced to buy stocks and push the market higher. Most investors will be scratching their heads as the market rallies and the long-anticipated capitulation selloff does not arrive. Quite frankly, that selloff would make things too easy.

When everyone thinks something is going to happen – something else will happen.

Well respected investors are making the point that market valuations are elevated and that they need to present better value given interest rates, Fed policy and inflationary geopolitics before they commit more capital. My response to that argument is that asset prices do not necessarily need to go lower. If the market just holds its valuation long enough corporations will earn increased profits over time. Markets can correct by going down or sideways. Time heals all wounds.

The pain trade is that the market begins to levitate higher. If the market begins to rise coming out of earning season systematic investors will be forced to chase. Pension funds and insurance companies will be hot on their heels. On July 27, the FOMC will meet and rise rates again. The corporate earnings season will be complete and corporate buybacks will come flooding back out of their blackout period.

Will a rally be the real thing or just another bear market rally? We would lean to the latter.

We would love to see a capitulation event but that would seem to be too easy.

 

“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.