H.A.L.
Posted on Sunday, October 21st, 2018
Homebuilders and autos tend to lead in the late cycle period. They also tend to peak prior to the end of hiking cycle such as the one we are in. They have been taking it on the chin as Mercedes and BMW reported horrible numbers last week and the Homebuilders ETF is down 18% in 5 weeks. We keep hearing from the pundits that you need to be buying the financials and the banks. Regional banks are down 14% from their June highs. Why? Banks need a steeper yield curve. The curve is flattening which is also sign of a recession ahead. These have been big signals. They have been ignored by most as the US stock market powered ahead while the rest of the world sagged. They aren’t being ignored any longer.
The machines are in charge here. We have spent the last week bouncing around the moving averages. In fact we have closed the S&P right on the 200 DMA for the last two Fridays. Coincidence? I think not. The machines know these numbers and gravitate back to them in absence of any direction. At some point the machines will determine which way we break from here. We are in the middle of a very large range from 2550 – 2880.2550 was support back in early 2018 and we may get a chance to revisit that level but for now, the risk is skewed slightly to the downside. We closed at 2768 on Friday so we see 120 points risk to the upside and 220 to the downside. The markets lack of will to chase back to the old highs tells us that more downside could be in store. A break below the 200 DMA could produce more selling. If the bulls move to the upside we think that we will see risk taken of the table and find resistance at 2825 and then 2880.
Gold has rallied as a safe haven. The moving averages are the key. They have sustained a heavy test. Can they hold? Anything is possible but the downside is more than the upside. The market needs détente or at least a thaw in China – US trade war. Keep your wallet on your hip and look both ways. We have reduced risk in recent days. We could see a bounce but I think that investors will be raising cash. The market could fall 20% and still only be back to where it was in early 2017. The Trump election night lows were at almost 1800. Keep that in mind.
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
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
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.