Bug Meet Windshield
Posted on Sunday, February 2nd, 2020
If you can keep your head when all about you are losing theirs … – Kipling
The most important thing to master when it comes to investing is your emotions. If you are not working in concert with your emotions than moves like Friday will overwhelm you. The market’s response on Friday to the Corona Virus was perfectly appropriate. If we are in concert with our emotions we are taking an appropriate amount of risk. If so, then we are prepared for a sell off and, in fact, welcome it.
We have to say that what is of paramount importance to us is the movement in the markets. We don’t go in search of a narrative. The narrative finds the market and sometimes the media just makes one up for us. In light of its recent rally from October 2019 the stock market was really a bug in search of a windshield and found one in the Corona virus.
We know that Fed policy has been driving asset prices higher and that stock market valuations have become stretched while US Treasuries and gold looked to be breaking out to higher levels. When torn between the actions of bonds vs. stocks we will always take the side of bonds. Once again bonds were right. We are underweight risk and looking to profit from any selloff.
What happens next? We have seen this movie many times before in our 30 years of market watching. Investors will first look to see if the 50 Day Moving Average (DMA) holds for support. It may hold, but we suspect, and, in fact, prefer, that it not. If the S&P 500 cannot hold the 50 DMA then the next big area to target is the 200 DMA. The 200 DMA is the demarcation line for investors as to whether an asset is seen in a bull market or a bear market. The 200 DMA will bring in buyers who see it as support –for now. They key then will be if it holds. We suspect it will.
As far as the virus goes it is most likely, given previous examples, that the virus growth will slow. Cooler heads will prevail. The economic fallout is real. The second largest economy on the planet is being deeply disturbed. We have been following copper for clues during this crisis. The downdraft in copper is the largest since 1985. That tells us that the worldwide economy and, more specifically China, is slowing. This virus will harm GDP for China and the rest of the world. Stocks should be lower.
Our bigger question about the response to the crisis is in monetary policy. If Fed officials and Chinese officials increase their monetary response to the crisis (and it looks like the Chinese will) then stocks may leap higher yet again.
We have our eyes on the 200 DMA of the S&P 500 as that may be the opportunity here. That will tell us if investors are still bullish or have turned bearish. We don’t think that the bears will succeed on the first try. We expect a bounce off of the average. That would put the market down 10-13% which would be a healthy event for the market.
If you can keep your head about you… you can profit.
Enjoy the Big Game!
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.