The Machines
Posted on Sunday, April 19th, 2020
As a trader on the street we were trained to be contrarians – to be vigilant in avoiding the consensus. The consensus since March 23rd has been that the lows in the market were going to be tested and that investors were confident that they were going to be buyers when that time came. This is what we had to say in our last blog post.
There seems to be a broad consensus that markets will retest the lows of March over the coming months. We have read thesis after thesis that the markets will test the lows and that those lows should be bought. The lows of December 2018 were never retested as systematic trend following strategies chased the market higher. From Farrell’s Rules of Investing – when everyone thinks something will happen – something else will.
In conversation after conversation that I am having with serious investors’ one question seems to be focused on. Why is the market up so much, so quickly, in the face of economic devastation? The answer is systematic trading funds. For years we have remarked that systematic trading strategies drive markets and drive them to extremes. There is a feedback loop that is developed as machine generated algorithms march prices higher and lower. This bounce has seen an absence of sellers as markets hit their nadir in late March and sellers exhausted themselves. As the US government threw trillions of dollars into the system in a two week period markets found a floor. Systematic strategies hit critical levels and turned markets higher. The concept of reflexivity is alive and well.
We think that the consensus of “the lows will be tested” has been replaced by “the Federal Reserve will save us all” and “tech stocks are the place to be”. Systematic strategies can knock markets down even faster than they chase markets higher. We take the stairs up and the elevator down. Fair value is probably closer to 2500 on the S&P. I say probably because no one really knows what earnings are going to look like for the next 2 years. I suspect that Americans will get back to work much sooner than the rest of the planet. The problem then becomes what about the rest of the planet?
Our next focus may be on tech as investors bid tech stocks back to old highs. The disparity between tech and small caps stocks has gotten to extremes dating back to the tech bubble in 2000. We think that it is time for a more active approach to investing rather than relying on passive as has been the trend for the last decade. It is reasonable to think that tech is the big winner here but when everyone thinks something is going to happen something else will.
We look to stay patient as we believe that we should get better value for our investing dollar in the face of global depression but the US government intervention may have supplanted price discovery for now.
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.