Trapdoor
Posted on Monday, April 9th, 2018
The bears won last week as any and all moves by the bulls were rebuffed. The bounces that are coming are of the bear market variety. They are large bounces on light volume as buy interest wanes. The gaps continue to remain unfilled at 2850 and 2700. The bear case is being validated. The 200 Day Moving Average (DMA) is what the entire street will be watching this week. The 200 DMA is a widely used gauge for investors as it is used as a barometer as to whether we are in a bear market or a bull market. We closed the week practically sitting on it. We have not been below the 200 DMA in almost two years since June of 2016. When we violated the 200 DMA in September of 2015 the market struggled for 10 months. We have been calling for the market to struggle for 9-18 months since we hit 2666 on the S&P 500 in December of 2017. We are now 5 months into that struggle. I can hear the question. Why not then just get out of the market? The market can do three things. Go Up, Go Down, or Go Sideways. By being invested you make money in two of those three scenarios. We don’t know that the market is going to go down. We have made some sales at these elevated valuations and with those proceeds we are prepared to makes purchases at lower prices.
If the 200 DMA is violated by a close this week we could see trapdoor selling. By that I mean that bids will be pulled and those who were once buyers become sellers. Trump made noise again last week on the tariff issue but markets sensed something different in his tone. He tweeted that he would accept a stock market drop because it was up so much already and that trade tariffs are in the best interest of American long term. He might get some push back on that thought, especially, from the bulls.
April, which is historically the best month for the Dow, is off to a very bad start. New money for the month did not help tip the scales in favor of the bulls. The bulls do not have a lot of conviction and if the 200 DMA is violated momentum funds will become sellers further driving the market lower. We expected the market to test 2550 and we did see 2555. Close enough for government work. We now expect the 200 DMA to be tested and for Wall Street to fail that test. We did not see the market bounce into the 2700-2750 area and that gives more power to the bears. The stock market is primed and ready for a drop.
A short one today as we tee up our quarterly letter for next week. I think we will have plenty to talk about.
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.