Where is Santa?
Posted on Sunday, December 9th, 2018
Markets have grown so jittery that they seem devoid of any connection to reality. In NYSE trading floor lexicon the current market action is known as getting “whipsawed”. Markets move higher and you buy. After you buy markets mover lower and you sell. Rinse. Repeat. Very frustrating and a big money loser. What is going on? Markets are being driven by mathematical computer programs. Those programs get investment funds long or short depending on levels in the market or headlines in the newsfeed. Those headlines and lines on a chart are directing huge amounts of investing capital and they are getting burned. Those quant funds have now turned short. Will they get burned again and markets head higher where they cover and get long or will markets finally break down? Small cap and mid cap stocks look to be breaking down. It’s going be an interesting week.
This is what we had to say last week and the game remains the same.
Don’t get caught up in the day to day and the twitterverse. The near term is dictated by jumpy traders and quants. The real longer trend and cycle is determined by monetary policy and the Fed and that has not changed. Let the traders chase this market. We are still stuck in the range between 2550-2950 on the S&P 500 and anything else is just noise.
These are not the types of days that you see in bull markets. These are bear market days. The volatility is brought by investors reaching for liquidity on the down moves and seeking long exposure and covering shorts as they chase the market higher. This week was really one big short covering rally. Short covers tend to be fast and sharp and die off quickly. It’s like throwing kerosene on a fire.
The sharp rallies and subsequent selloffs have our attention especially at this time of the year. December is historically a strong month. When seasonality behaves we ignore it. When it goes against its historical norm it gets our attention. The old Wall Street saw is that a bear will come to Broad and Wall should Santa Claus fail to call. A weak December may have Wall Street shooting first and asking questions later.
This is the Everything Bubble. We are seeing some extremes that happen very rarely. In 2017 we saw 90% of investable assets higher and now, in 2018, we see 90% of assets negative for the year. That signals “The Everything Bubble”. No single asset is in a bubble (with the possible exception of negative yielding government debt and leveraged loans.) We don’t have the excesses of prior periods like the Nifty Fifty in 1960’s or Internet stocks in 2000 or housing in 2007. What we have is excess across the board. It’s like a stealth bubble. Everything is overpriced and the air is being let out of the balloon. Valuations are coming back into line. There is a tendency of cycles to over correct. The pendulum swings back past the mean into undervalued territory. In this scenario prices may not come down as much as in 2008 but across asset classes they will come down. While stocks have been slightly over valued we think they will get to slightly undervalued. The Federal Reserve may have something to do with that as they stop tightening and could, in fact, begin to ease sometime in the next 18 months.
Mini range from the last month is 2625 – 2825 on the S&P 500. On Tuesday we hit 2800 on the upside and by Friday we had touched 2625 on the downside. Close enough for government work. Russell 2000 and Mid caps look poised to break down through the lower end of their range. IWM (Russell 2000 ETF) looks ready to punch down to 134 from its current 144. That would be down another 7% and put it down 22% from its high in September. Bull markets tend to cycle up for 7 years and bears cycle down for 18 months. Keep an eye on JP Morgan. It is one of THE Generals in the market and must hold support here. A breakdown for the big bank would give support to the bears. Longer term, I think we could revisit the lows of election night. Would that be irony or symmetry?
We have a suspicion that the inversion of the yield curve which sent markets falling could be technical in nature. We don’t see a recession on the horizon just yet. If markets read this wrong and overreact it could be a tremendous opportunity.
A bear will come to Broad and Wall should Santa fail to call. Why do we just get out of the market? We don’t know what the market will do. We see where we are in the cycle and are more aggressive or defense depending on where we stand in the cycle. We can’t predict day to day moves but if we get the cycles right and align ourselves properly we will make money over the long term. We feel that we have been high in the cycle and have taken less risk. No guarantees. Remember, the main driver here is central bank liquidity. Right now they are draining. They could turn on a dime and stop draining or even add. We don’t know but we can prepare. We have cut risk in 2018 and right now that feels pretty good.
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.