So Long Summer
Posted on Sunday, August 13th, 2023
My longtime friends from high school and I have a unique tradition. Every five years, we embark on a special trip with our wives. In 2018, on the occasion of our 50th birthday, we celebrated in Tuscany, residing in the splendid villa owned by Trudy Styler and her husband, Sting. This year, we opted for a change of scenery, spending our cherished time aboard a yacht in the sun-soaked landscapes of the French Riviera. Among the destinations, St Tropez stood out as my personal favorite. You can see why people are drawn to it year after year. It is a quaint fishing village with the most perfect and gleaming cobblestone streets. It is so perfect that it makes you feel like you are on a movie set. You feel as if you have stepped back in time to a simpler, more straightforward time and place.
Nonetheless, the vigorous traveling took a toll on both Diane and me, leaving us a bit drained upon our return. Amidst the globetrotting, we managed to carve out a slot to visit Diane’s brother in Palm Coast, Florida. His recent relocation there marked a significant shift after three decades spent in Dallas. Witnessing him embrace this new chapter in his life and seeing him so happy fills us with immense excitement and joy.
As we transition back into work mode following our rejuvenating summer vacation, we find ourselves with a renewed sense of energy and determination. The break has granted us the opportunity to recharge, and we hope you have had a chance to do the same. Now we are poised once again to tackle the challenges of the market. Armed with a refreshed perspective, we’re prepared to take on whatever the markets may throw our way – and we think that it is about to give us all we have bargained for.
While it has been a sleepy summer and, in general, a sleepy 2023 we think that the back half of 2023 is going to be very different that the first half. Our proprietary indicator tells us that volatility is about to make its way back into markets. It is a signal we have developed, taking cues from some of the best and brightest traders and researchers. It only gives us these clues every couple of years. Right now, it is flashing caution. It tells us that volatility is about to rise in the market, and there is a way to play that trade. As a rise in volatility is usually accompanied by a fall in stocks, it also implies that stocks are about to fall, but that is not guaranteed. Our data indicates that we would expect this to start to come to fruition over the next couple of weeks and that stocks should fall between 5-20%.
We mentioned several weeks ago in our letter that it would be most like the market to suck back in all those who had sought shelter for the coming recession. We also mentioned that a break above 4200 on the S&P 500 would be the cause. The rise to 4600 has pulled everyone back into the water. Systematic strategies are back and “all in” while hedge funds net leverage is approaching the 99th percentile. Going back to 2008, downside protection in puts has never been cheaper. One of the best trades in 2023 has been selling volatility. That is like picking up pennies in front of a steam roller. We think the steam roller is about to have its day.
We see the coming uptick in volatility as an opportunity. This is not the crash of 2008 or 2020.
Band of America writes that we are seeing a turn in psychology, but this is not complacency, according to the investment bank. Such sentiment uplift, especially after a long stint in the panic zone, often suggests a shift in investor psychology rather than complacency, similar to trends observed during 1990-91, 1998-99, 2001-02, 2008-09, 2011, and 2015-16.
We will know if the shift in sentiment turns this into the beginning of a more prolonged bull market when the S&P 500 tests the 4000-4200 area. A short-term selloff of 9-13% would present itself as a healthy selloff burning off positioning too heavily weighted towards the bulls.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
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.