Bolt
Posted on Sunday, October 22nd, 2023
We find ourselves once again in the realm of negative gamma, a phenomenon we’ve delved into previously. It’s worth noting that during most extended market selloffs, the majority of trading days exhibit this characteristic. But what exactly is negative gamma? Think of it as the moment when the market is most sensitive to external news and events. To draw a vivid analogy, picture the market as a spirited horse within a corral, with the corral symbolizing market positioning largely occupied by options traders. When the horse is contained within the corral, it may kick and rear without causing much havoc. However, there are times when the market stretches too far, which is akin to leaving the corral gate ajar. This doesn’t guarantee the horse will bolt if startled, but it does mean that if it does, it can run much farther than expected. Negative gamma essentially releases the horse (the market) from the corral, exposing the market to news events. This sell-off prompts options traders to scramble to keep up with the market’s movements, often resulting in compelled stock selling.
As the market experiences a period of sell-off, I want to reassure you that there’s no need for concern. We’ve been managing our portfolio strategically. The troubles in Palestine have the market on edge, and market participants are rushing to hedge buying puts, gold, and oil futures. Our emphasis on oil and gold has undoubtedly helped us out again this week.
Our investments in gold and oil have not only weathered the storm but have also provided us with a healthy return. Additionally, we made the decision to stay out of bonds for approximately a year, a move that has proven advantageous in the current market conditions. Furthermore, our substantial cash positions have been actively contributing to our financial stability, generating a solid and safe annual yield of 5.25%.
It’s worth mentioning that we are closely monitoring the bond market as we anticipate potential opportunities as yields approach tradeable levels. We are anxiously poised to capitalize on these opportunities. The bond market is acting as a governor on Congress’ spending. The monstrous deficit spending is causing a major pause in bond buying for investors. Our research leads us to believe that it is possible that we find a tradeable bottom in November 2023.
In the last several months, we have seen regional banks break down in price. In a very similar pattern, micro-cap stocks have broken down as well. Small-cap stocks appear to be next, followed by large-cap banks. Don’t worry too much. We don’t own much, if any, of those equity sectors, and our stock positions are quite light. We relish the opportunity to buy stocks at a discount. The pain trade for the last two months of 2023 would be if markets were to head higher and force investors to chase. Markets are oversold here, and we are inclined to dip our toe in and add to stocks, but this will probably be a temporary bounce, and we don’t see ourselves chasing wholesale until interest rates are headed lower.
The S&P 500 closed at 4224- down over 100 points on the week and ever closer to the all-important 4200 level. We are at an inflection point in the market, and it is decision time. 4200 must hold. Small caps never got the bulls’ memo and are approaching a must-hold area as well. A breakdown there could send the Russell 2000 down another 20%. If small caps hold and the S&P 500 holds 4200 we will most likely rally into the end of the year. We are going to need to be very nimble here.
“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.