Monday’s Blueprint for Markets
Posted on Sunday, March 25th, 2018
Here is our Blueprint for Monday and beyond. Since the election of Donald Trump we have been building an investing scenario that looked much like 1987. We were calling for a 1987 style melt up and then, a smack down.
A 30% run from the lows before Election Day, much like 1987, …would put us squarely in bubble territory as the S&P 500 would approach the 2750 area. A subsequent 30% retreat would bring us back to the 2000 area. (The S&P 500 was at 2360 as we wrote.) Witches’ Brew Blackthorn Quarterly Letter April 2017
We may have missed the top by 100 points on the S&P 500. Last month we backed off of the 1987 style melt down part of this scenario in light of everyone jumping on the 1987 bandwagon. We have begun to expect a more drawn out solution but you must be prepared for either in this environment.
This is what we had to say in our blog post Warning Shot Across the Bow published 2/4/18.
Our new scenario calls for a more drawn out selloff. First, we may see a drawdown in the magnitude of 5-15% followed by a retracement back to the old highs. From there (You Are Now Here) we should see a selloff of a larger magnitude leading to a bear market over the next 18-24 months. It’s not voodoo. Valuations show that historically we will see limited upside from these levels. Markets are high. Rates are rising. The yield curve is flattening. Markets tend to struggle in the second year of a Presidency as midterm elections approach. It’s not rocket science. It’s the study of psychology and history. We have seen the warning shot across the bow. Buckle up. It’s going to be a bumpy ride. Watch the central bank balance sheets. If they stop tightening all bets are off.
As far back as October of 2017 we were warning about the 2666 level on the S&P 500 and a struggling market for 18-24 months.
We felt that the market would struggle for 18-24 months when it hit 2666 on the S&P 500. The market has spent time at each multiple of the 666 low in the S&P. 2664 is 4x the 666 level. You must remember we are dealing with algorithms written by humans. Levels like 666 and 2x, 3x and 4x are just levels in a computer program. Be careful of computers. They only do what they are told. As computer use has created a wondrous cycle of upward movement so we can have the vicious spiral downwards.
Market structure could exacerbate may any selloff. We have warned about market structure in the past and here is where you can do further reading from our blog posts – My Name is Mario, Paradox and Caution Flags.
The market is flawed in its design as its automated structure puts the momentum players, the market makers and algorithms in control. While it is pleasurable to see it go up every day it will be much quicker and painful when the market goes down in a one way fashion. For every action there is an equal and opposite reaction. Blog Post “My Name is Mario” 10/28/2017
We mentioned on Twitter on Thursday morning that gaps at 2850 and 2700 would lead technicians to project a measured move lower to 2550. That was 4% lower as we wrote. We realized that a move of that magnitude would take the S&P down to test the lows from February’s vol quake. What we didn’t realize was how quickly we would get to that number. For next week the old school playbook is for a rough Monday and a chance for the bulls to turn things around Tuesday afternoon. We have a feeling that Wall Street didn’t study for this test. Market is very oversold and due for a bounce. How it reacts to the prior low (2550) will tell us a lot.
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.