Don’t Just Do Something – Sit There
Posted on Sunday, July 25th, 2021
That was an interesting week. My daughter spent some time at home while I got a chance to play some golf. I received some advice from a golfing buddy and it worked out quite well. I shot a career low of 73. What was the tip you ask? He said, “Don’t try so hard.” It worked. I didn’t over think it and just let things happen naturally.
The best investing advice that we could give back in May was to “Sell in May and go away”. That advice really means to get your exposure smaller and do nothing. That’s right. Don’t’ just do something. Sit there. That’s kind of like “Don’t’ try so hard”. That served us well this past Monday as the Dow Jones fell over 700 points and then spent the rest of the week surging back to all time highs. What the hell is going on? We have written about this extensively. It is not the delta variant or economic issues or anything the President said. It is market structure that is now allowing for harrowing drops followed by spike rebounds – roller coaster markets. It is all about the options market and dealer positioning. The rest is just a narrative and media outlets looking for a story to tell. Tons of options gamma rolled off on Friday allowing more market movement. Dealers get caught long and are forced to sell. Soon the stretched position of the market leaves no one left to sell and dealers are soon chasing markets back up. Don’t just do something. Sit there.
We might be more inclined to do something soon if our indicators have their way. This is what we had to say last week. As market internals deteriorate we are on guard for a change in trend and rise in volatility. We have stuck with the higher trend since the pandemic in spite of all time high valuations. We have a proprietary indicator that, given the current monetary/fiscal regime we are under, should alert us to danger on the horizon. Our proprietary indicator has now ticked the first box. If it ticks the other box we will be taking down exposure and placing hedges. This could occur as early as tomorrow and would portend a large move in the next two months. They say never predict time and price. We are not predicting anything. We are just preparing for a potential storm and battening down the hatches if our indicator flashes red. Right now it is yellow.
The S&P 500, Russell 2000 and oil all bounced at critical levels. That’s one for the bulls. Market internals continue to deteriorate. That’s one for the bears. Our first indicator has gone further into the warning category. That makes us feel like it is a matter of time before the second indicator flips negatively. We would expect something to happen on our indicator in the next six weeks. Coincidentally, the additional pandemic unemployment benefits run out six weeks from now on September 4th. Septembers’ have not been kind in stock market history. We have had some real doozies. Not trying to foresee the future but just looking to put contingency plans in place.
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.