Ride the Wave
Posted on Sunday, January 6th, 2019
We had hoped that the New Year would settle markets. It has not. Why the volatility – the severe swings in the market? A lack of liquidity. Year end markets are notoriously illiquid and if there are fewer bids and offers in the market place then there is the possibility of wider swings. Wider swings and more volatility chase investors from the market. Fewer players mean less volume which leads to more volatility. Volatility begets volatility. We entered a vicious circle of rising volatility. Markets will calm down. It just takes time.
Let’s review where we have been. Here are some snapshots of our blog posts and summary of important levels in the market.
On 12/8/2018 we stated that the S&P was in a mini range of 2625-2825 while the broader range was 2550-2950.
On 12/14/2018 the S&P closed at 2599. That signaled to us that the S&P 500 would break down to at least 2425.
On 12/21/2018 the S&P closed at 2416 and we noted that any further selling should be bought while we saw a move higher back to 2525. The low on Christmas Eve when we added to positions was 2351 – the panic low.
On 12/30/2018 we noted that the support that was located at 2550-75 is now resistance. On Friday we closed at 2531.
This is not an exercise in vanity I assure you it is an exercise deeply rooted in my 30 year career of investing. Markets have a way of humbling all investors. Over our decades spent investing we categorize our victories but also our failures. While we have been quite correct of late we ask ourselves where are we most likely to make a mistake? How have markets humbled us in the past? If we utilize that information we are far more likely to make that mistake a small one or avoid it all together. Markets in the past have tended to humble us by going far further to the upside than we expect.
In mid December we predicted a breakdown to the 2425 area of the S&P where we expected a bounce from oversold conditions. Now that we have made that move where does that bounce conclude? Recent support is now resistance so first resistance on this rally would be 2550-75. We expect markets to prove us wrong by cruising to 2600 and possibly beyond. If markets were to pass 2740 momentum players will flip from a short position, (betting on markets to go down as they are now positioned) to a long position. Once they are long that would be the moment the market turns lower.
How to play this? We see the rally stalling at 2550-2600. If the market plows thru this level we would look to hold on and make sales in the 2700-2800 area. We see investors renting this rally and not buying it but if the market were to rally far enough investors will be forced to give in at exactly the wrong time. Don’t be one of them. The market looks to make a fool of and cause pain for the most people it can. Right now the pain trade could be higher but don’t get sucked in. We have called for an eventual fall to the 2100 area on the S&P 500 or the lows of election night.
You can almost feel the fear from Christmas Eve changing to greed or fear of missing out. When we all start to wonder why we ever sold in the first place it and want to buy it will be time to sell again. Market lore would tell us that the lows of Christmas Eve need to be tested. We believe they will. Sharp rallies remind us that this is a bear market. The next wave down will be Wave #3. Hopefully, but not guaranteed to be the final wave. The final wave is usually the sharpest. Bear markets tend to take 7-18 months. We are in month 4 from October but this bear really started back in January of 2018. That makes for a rough start to 2019.
“I’ve never made a buy at a low that I didn’t just feel terrible and scared to death making it,” Stanley Druckenmiller legendary investor
It’s okay to be scared. Even the best investors are. They just control their emotions and take advantage of the situation. Groceries are going on sale – make your list. There is more to come in our quarterly letter. We made some purchases on Christmas Eve but are still underweight equities. Cash has been king in 2018.
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.