Fever
Posted on Sunday, August 7th, 2022
The mattress finally arrived! I am sleeping so much better. It is probably the best I have slept in a month. It’s nice to finally get some consistent sleep. While the new mattress has certainly helped my sleeping patterns the 9 Advil I took over the course of the day might also have something to do with it. Don’t call or email with alarm. This is on doctor’s orders. It turns out I might have a teensy bit of a rotator cuff issue. I have got to tell you. I am not afraid of dying. It’s the journey there that scares the hell out of me. Everything hurts. Preaching to the choir I know.
This is the part where everyone starts scratching their heads wondering why the stock market is going up. The market ignored inflation. Then the market ignored the looming recession. It is now ignoring the looming impact the recession and receding inflation will have on corporate earnings. In the last two weeks we warned you that when everyone expects something to happen something else will. The rally is being led by price agnostic strategies – Corporate buybacks and systematic strategies. This is pulling in short sellers forced to cover and will soon pull in investors who are now afraid of missing the rally and underperforming.
How do we know that this is just another bear market rally? The signs of loose risk management and speculation are back. We see it in the rise in Meme stocks like AMC and GameStop while speculative issues run wild again in the market. That is not the sign of a bottom. It is a sign of late-stage speculative fever that has not burnt out yet. We have more time to go on the downside.
One thing to file under the good news category is that we are back in positive gamma. Positive gamma in the options market brings less volatile markets which tend to trend upwards. Come to think of it – maybe THAT’s why I’m sleeping better. One down day of 1% or more and positive gamma is gone. The bulls have the ball for now, but they are approaching downtrend lines and important moving averages. The light volume of August may help the bulls. September may be a different story.
The coming weeks may bring a more aggressive Federal Reserve. Congress is about to pass another budget bill with another trillion-dollar deficit (and they are left wondering where inflation is coming from). Congress really doesn’t care about inflation. That’s the Fed’s job. I would expect a surprise rate hike in the next few weeks. The higher prices of the stock market give the Fed cover to raise rates further. The yield curves continue to invert but the Fed may raise anyway. This is the decade of inflation on Main Street – not Wall Street – and it must be stamped out. The Fed will raise rates until something breaks, and they are forced to stop. By then, systematic strategies will be long, and the shorts will have covered. At some point sentiment will change in favor of the bulls. This is precisely why the last move lower in a bear market is usually the quickest and steepest. When everyone thinks something is going to happen – something else will.
“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
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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.