Iceland

We are now sending out our weekly note by email. If you have missed us and would like to receive it by email contact me at Terry@BlackthornAsset.com. Iceland was a fantastic experience. We arrived in the wee hours of the morning and had breakfast at a local bakery picked out by our guide. Wherever you go in Iceland, the bread is absolutely the best you have ever had. I have no idea why. Even the rye bread ice cream was out of this world. The people in Iceland are friendly, hard-working, and incredibly proud of their country. We passed the President of Iceland’s office, and our guide encouraged us to knock on the door. A door without a hint of security around. I only saw one police officer the whole time we were there. It’s a very safe country with one of the lowest crime rates in the world, filled with wonderful people, and incredible food. We went on tours to Gullfoss, the major waterfall, and the Great Geysir, where the term geyser originates from. We also went for a snowmobile excursion out on a glacier. I highly recommend Iceland for a weekend getaway or a layover on the way to Europe. In fact, a quick layover will allow you to experience the geothermal spa of the Blue Lagoon and head to Reykjavik for lunch. That is if the Blue Lagoon is still there after the volcanic eruption on Saturday night. It’s probably good that we missed that.

As far as markets go, we seem to be heading towards stagflation, as indicated by gold and oil’s performance in recent weeks, outperforming the SPY by 5% in the past month. We are happy to have added to our positions there. Most portfolios are light on commodities, especially in 401K plans. When investors realize this, it will be too late.

We look at specific indicators and give them more weight in our market analysis. One of these indicators is the Goldman Sachs sentiment indicator, which is hitting overbought levels we haven’t seen in some time. No indicator means as much to us as our proprietary indicator, which indicates when markets are unprepared for a news event. That time is upon us. Systemic strategies are now very long, as are momentum traders. It is almost as if everyone is on the same side of the boat. Investors are unprepared as most expect the market to continue its run higher and see no need for downside hedges. The news event becomes market moving not based on the news but based on the lack of preparedness. It’s the old stability breeds instability theory. Our indicator is now flashing yellow and telling us that downside hedges and getting long volatility are the play. The movement in our indicator was very sharp and akin to the signal we received in Jan 2018 before the Volmageddon trade when the VIX went from 10 to 50 in a month.

We have finished Game of Thrones by the way. It was amazing. We don’t expect a Game of Thrones-type massacre in the markets. Market sentiment has been running hot, and a bit of a speculative fever has been underway. Usually, we would see a healthy pullback of 8-10% and a move back towards the old highs. Bottoms in the market are events. Tops are processes that can take longer than you think.   

This is what we had to say last time we wrote.

If a stock or index gets this high, it shows how much the animal spirits have taken over. It DOES NOT mean stocks are going to crash. It means stocks need to take a breather, and when they sell off and relieve the overbought condition, buyers will most likely start returning. Just like in 2018.

“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. 

Big Game

Since October, the stock market has been roaring higher on the idea that the Federal Reserve was winning the battle against inflation and was ready to start lowering rates. This was the much-hyped “soft landing” for the economy. Since January 12^th, the market has gone from pricing in 7 rate cuts to just 4, and the market has rallied 5%!! Jim Bianco from Bianco Research notes that the New Zealand central bank has been out in front of this economic cycle. They were the first central bank to move to higher rates in this cycle. They were the first to pause rate hikes and now, will be the first to start hiking rates again. My thesis has been that inflation will be difficult to tame and come in waves. The folks down under are feeling the heat. Are they the canary in the coal mine?  

We made the call in January 2022 that we would be in a sideways to down market for 18-24 months. Since that call, the results have been pretty poor for stocks but even worse for bonds. The S&P 500 is now up 4% from its prior record closing high in January 2022, and gold is up over 12%. Bonds are down over 9%!! We sidestepped the bond losses and have held a decent percentage of gold. We are cognizant of the gains of the last 15 weeks but have learned never to chase the market. A bull run this long hasn’t taken place since 1972. We need to stay patient here. While markets can stay irrational, stair-stepping higher week after week, when markets correct, they take the elevator down. That is how we make quick gains on the market averages.

Enjoy the Big Game. We love the Brock Purdy story and will be rooting for Cinderella to do the unthinkable and go from the last pick in the NFL Draft to Super Bowl champ.

“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. 

Sound and Resilient

On a personal note, January was a month spent trying to get back in shape from the “Holiday Over-Everything Binge.” The month was spent trying to get to the gym and watching what I ate. On the positive side, Diane and I also enjoyed our time by the fire and watching Downton Abbey. No. I’m not ashamed to admit that. My favorite character was Isis, the labrador retriever they killed off in Season 5. I hope I didn’t spoil anything there. On a professional note, I spent most of my month doing paperwork. I’m looking forward to more sunny days in February.

As much as I look forward to turning the page on the calendar, the market usually does not look kindly on February. Over the last 50 years, February has been the second worst-performing month of the year. The last two weeks of February are historically the worst two-week stretch of the year. But this February, it seems as if the entire universe is looking for a drawdown this month to add to their Nvidia and Microsoft holdings.

Keep this in mind.

George Soros’ “Theory Of Reflexivity.”

“First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times, it is quite pronounced. When there is a significant divergence between market prices and the underlying reality, there is a lack of equilibrium conditions.

I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced… Eventually, a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.

Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions.”

The big news this week in my mind was the earnings of the New York Community Bancorp. The stock of the regional bank with significant commercial real estate loan exposure was down 40% this week as it took substantial loan loss provisions. The CRE crisis is starting to hit home. There is a regional banking crisis on the horizon again.

The Federal Reserve stated this week that they may be able to lower rates in 2024. Why would they do that if the economy is fine, jobs are up, and inflation has been tamed? The most recent statement from the FOMC took out the line about a “sound and resilient” banking system. So, if the market usually goes down in February and a banking crisis is on the horizon, why was the market up this week?  The stock market is front-running the banking crisis. They know the Federal Reserve will lower rates, add liquidity, and save the day. Combine that with an economic recovery from deficit spending, and away we go. Remember that Congress will refuse to slash spending in an election year, and the Fed will not want to crash markets, which would only get Trump elected.

Some analysts I respect are starting to compare our current stock market to the market of 1998-99. That market went parabolic in late 1999, as you might recall. Now, this market is beginning to show some signs of exhaustion. The market internals are showing that the rally is getting a bit too narrow, and some negative divergences have developed but the speculative bubble is still booming.

“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. 

A Better Way to Give

It has been freezing here in Atlanta. I have my office space heater cranked to the maximum. I am ready for spring to arrive. While trying to stay warm I’ve been spending a significant amount of time in the office analyzing tax rules, and I want to share another valuable tip with you that could potentially help reduce your tax burden. This strategy is not entirely new but has been improved under the Secure Act 2.0, which was passed by Congress in 2022.

If you are someone who makes substantial charitable contributions, there’s a more tax-efficient way to do it through what’s known as a Qualified Charitable Distribution (QCD). Here’s how it works: If you are aged 70 ½ or older and are required to take Required Minimum Distributions (RMDs) from your Individual Retirement Account (IRA), you have the option to make a direct distribution to a 501(c)(3) charity instead.

Rather than taking your RMD as taxable income, you can directly contribute it to your chosen charity from your IRA. By doing this, the income no longer counts as part of your IRA, thereby potentially lowering your taxable income and, consequently, your taxes.

This approach not only benefits the charitable causes you support but also serves as a strategic way to save on your taxes. If you’re interested in exploring this option further, please feel free to reach out.

The market has been on a good run but one that lacks a bit of oomph. (That’s an industry term.) While we have hit a new all-time high in the S&P 500 this rally lacks enthusiasm. It feels and looks more like all the sellers have gone on strike. Hedge funds have not added to their long positions, and mutual funds/ETFs have seen outflows. Recently, we took note of Goldman Sachs’ quarterly earnings report and, more significantly, their investment holdings. It reminded us of a similar note we sent out to you back in the summer of 2021 as markets then approached all-time highs.

Econ 101

I have spent part of my summer tutoring our middle son in Economics 101. I know what you are thinking – Fun time at the Reilly’s. My son was having trouble making sense of Econ 101. I showed him that it really is basic. They just try to make it sound hard. They fill their definitions with multiple-syllable words in order to make it all sound impressive and confusing. Much like economists bankers like to obfuscate and confuse. In Goldman Sachs’ latest earnings report we see that the investment bank has been “harvesting its balance sheet equity portfolio”. Just like Econ 101 they are just trying to make it difficult. In plain English, they are selling their stocks in size. They have sold 25% of their portfolio in 2021. Goldman is selling. Should we?

In the summer of 2021, the market continued its upward trend for an additional six months, resulting in a gain of 2.3%. However, this marked the highest point it would reach for two years. Guess who has been “harvesting it’s balance sheet equity portfolio” (selling) again? Goldman Sachs sold 43% of their prop trading portfolio in 2023!! The most significant tranche was sold in the last 2 months.

Tech stocks rallied last week but not much else. The opportunity set in this market is balanced, and risks are symmetrical. That means that the market isn’t cheap and it isn’t expensive. Things could go either way. This rally is unloved and has been met with outflows! We have been anxiously awaiting the options expiration that occurred on Friday. This was one of the top 5 options expiring of the year, and how the market performs in the following days will be very important. We will be watching the market intently on the first few days next week. If stocks fail to sell off, then FOMO could set in (and stocks rally) as investors chase performance.

“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. 

Clean Up

Life is quickly returning to normal around here, bringing a sense of calm. The kids have returned to their work and school routines, securely settled in their apartments and dormitories. The quiet evenings reading by the fire have been quite enjoyable, and I’ve even begun my early spring-cleaning efforts.  There is something so satisfying about cleaning out the basement and cluttered files. I am definitely going to need a dumpster. The thing I am most happy about is cleaning up is my diet. No more cookies and cake for me – for now.  

Spring cleaning and new tax rules – exciting stuff. There are actually two new tax rules that I am excited to talk to some of you about this year. The first and subject of our note today can help you prepare your kids for their future and clean up some accounts gathering dust. As of the beginning of 2024, you can turn a 529 Plan into a ROTH IRA. If you have a 529 Plan Education Account that isn’t being used, keep reading.  

In late 2022, Congress enacted the SECURE 2.0 Act, introducing significant alterations to U.S. tax legislation to enhance Americans’ capacity to increase their retirement savings. Among its provisions is the introduction of a novel option for transferring funds from a 529 account to a Roth IRA. This innovative feature enables families to transform any remaining 529 funds into retirement savings, all while bypassing penalties associated with non-educational withdrawals. 

It’s the IRS. Of course, there are rules. Here they are: 

• The 529 plan must be open for a minimum of 15 years before you can do a 529-to-Roth IRA transfer. 
• The beneficiary of the 529 plan must also be the owner of the Roth IRA. 
• 529 plan contributions made within the last five years aren’t eligible for a tax-free transfer. 
• There’s a lifetime maximum of $35,000 for 529-to-Roth IRA transfers. 
• Normal Roth IRA annual contribution limits apply. 
• There are income limits to the ROTH contribution, but it is over $125,000 (child’s income as a single individual) 
• They have to have earned income and cannot contribute more than they made in income. 

If you have a 529 that has been sitting gathering dust, get in touch, and we can see if this option works for you. 

Stocks were overbought, but sentiment and position have backed off a bit, which is one for the bulls. The yield curve shows signs that it may dis-invert, which has our attention – in a negative way. Given the moves from the November low and hedge fund positioning, we would expect to see the market sell-off by at least 5%. It hasn’t, and that is another one for the bulls.  Our calendar’s next significant data point is the options expiration this Friday, January 19^th. This is one of the top 5 options expirations of the year, and how the market performs in the following days will be very important. We will be watching the market intently on the trading days after the expiry. If stocks fail to sell off, then we could be off to the races. The month of March has significant issues, more of that in a future note.  

We are considering switching to an email note each week rather than wordpress. If you are interested, please let us know at Terry@BlackthornAsset.com

“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.  

Time

S&P 500 close on 11/30/21: 4,567

S&P 500 close on 11/30/23: 4,567

We let you know two years ago that we expected to see the market stuck in a trading range for the next 18 months. The numbers above show that the S&P 500 has gone nowhere for two solid years. The question now arises: is it finally time to break free from this persistent range?

We could be getting close, but we have some concerns. Our macro view is that inflation is not yet defeated, and that process may take the better part of a decade. In that time, we could see lower returns on assets and should be more tactical in our approach. Evidence that we may not be breaking out is that some of the biggest losers in 2023, including MEME stocks and heavily shorted stocks, emerged as this week’s big winners. Investors seem to be chasing higher-risk assets or ‘beta’ right now. That is more evidence of a bear market rally or performance chasing at the end of the year.  

There does, however, appear to be a reversal of sorts or an unwinding of legacy positions. Winners of late include real estate stocks and small caps, while big-cap tech did not lead the market last week. Are things changing? For the longer term? The market seems to be coming to the idea of a tighter Fed being removed from the equation. (March rate cut odds hitting a lifetime high of 80%)

It’s worth noting that not all market moves are entirely logical. Given recent economic data and posturing by the Fed, bonds have a real reason to rally. Stocks, on the other hand, need to reconcile the concept that there is mounting evidence that the economy is slowing down. The Atlanta GDPNOW tracker recently slipped from 1.8% to 1.2%. While this could fuel further speculation about rate cuts, the market will ultimately need to come to terms with the impact of weakening economic data on corporate profits. The weeks preceding the first Fed rate cuts will bring anxiety for stocks as their prices are reconciled with a faltering economy.

We are happy with our significant gold positions and our recent bond adds.  We need to stay patient with equities. The market can continue to move higher as conditions are not in place for a significant selloff. Systematic strategies have been unwinding their previous short positioning, particularly in bonds. Currently, equity strategies are only modestly long. The more investors chase this market, the more likely the conditions are created where the market is primed for a selloff, but those conditions don’t exist for now. The options expiration on December 15th is the next big data point on the calendar.

“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. 

Loop

Bear market rallies are known to be quick and harsh. We have now quickly rallied back up to the high end of the range we have been enmeshed in for the better part of two years. They say – “Don’t fight the Fed.” The Financial Conditions Index (FCI) is a weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems. Understand that tighter conditions mean the Fed might lower interest rates to support the economy and financial assets. A decline in the FCI means the Fed may seek to raise rates to slow things down.

The massive surge in stocks and bonds over the last two weeks prompted one of the most significant declines in financial conditions in the last few years. The easier conditions have erased all of 2023’s ‘tightening’ by the Fed. The new highs in the market have effectively put us back at the same level as when Fed funds were 150bps lower. They are calling it the FCI Doom Loop. The higher the market goes, the more the Fed will need to tighten. Round and round we go. Higher stock prices are “fighting the Fed”.

The end result of the FCI Doom Loop is a rangebound market that can’t get too hot or too cold but must stay just right, or the Fed will intervene.

This is what we said last week, and it still holds true.  We have no desire to chase as we see the next decade running lower investment returns. Playing the bottom and top of ranges may go a long way to increasing our returns. Stay patient. Stay nimble. Do all the little things right, like managing our cash. Don’t chase.

The rally this week was because so many were underinvested and were forced to buy. The other impetus (FOMO) was the end-of-the-year rally which is very much feared by those under-invested or short. We said we were going to have to be nimble… I don’t want to chase but mid-month we should see some pullback. 2024 is going to be another story.

Next week, we could see some pullback as the options expiration in November was quite significant. I am not saying that it will pull back, but it has potential due to the unlocking of the options market in the post-expiration period. The animal spirits are alive and well here as there is a palpable fear of missing out on the Santa Claus Rally. Seasonality in the market is something to be aware of, not trade on, but there seems to be many people betting on it this year.

“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. 

Quick Change

Like the weather in Atlanta – Things changed fast in the market last week. We swung from panic to outright greed in the space of 10 days. Now that we are in positive gamma, the market is just grinding higher until the next expiration, which is this Friday. Things have the potential to change again after the expiration on Friday resets the market, but I think that we will not see any significant changes given that the next week is Thanksgiving. Are we just going to see a market melt-up for the year’s end? We have probably already seen most of it. The market is swinging around too quickly and that indicates to us that we are still in a cyclical bear market.  

The leaders in this market, like Apple and Microsoft, are working their way to higher ground, and that is a positive sign. I respect this rally, but I have no desire to chase it. I expected bond yields to peak at 5.35% in November on the 10-year. We got to just shy of 5% and turned back down to 4.5%. The stronger the bond market gets, the more the Federal Reserve will have to talk down markets. So, I think investors jumped in too soon probably just because the calendar is getting ready to flip. This move in bonds doesn’t leave much room to rally, but the year-end could force more investors to continue to chase.

This is what we said last week, and it still holds true.  The rally this week was because so many were underinvested and were forced to buy. The other impetus was the end-of-the-year rally which is very much feared by those under-invested or short. We said we were going to have to be nimble… I don’t want to chase but mid-month we should see some pullback. 2024 is going to be another story.

We have no desire to chase as we see the next decade running lower investment returns. Playing the bottom and top of ranges may go a long way to increasing our returns. Stay patient. Stay nimble. Do all the little things right, like managing our cash. Don’t chase.

“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. 

Wow!

Wow! What a week!  I had the great pleasure of going down to my golf club to watch some of the best college golfers in the world play. It was eye-opening! These kids were hitting golf balls at what seemed like inhuman levels. I have been playing golf for 20 years and love it, so it was incredible to witness what these girls and guys can do with a golf ball. Golf used to be a fat guy smoking a cigarette. These players were natural athletes. I think that I need to work on my game some more.

Wow! That was also an ample description of the stock market. I told you we were in negative gamma. Negative gamma cuts both ways. This is what we said last week.

Negative gamma has us inclined to watch for a reflexive bounce, which could get legs into the end of the year… Year-end sentiment could easily take over in this negative gamma environment. Remember, it works both ways. Volatility up and down. Not just down. They could just as easily rip the market higher on little to no volume. We try to prepare for both.

Volatility goes up AND Down. Our signal first hit about nine weeks ago. Since then, volatility has ramped higher. The rally this week was because so many were underinvested and were forced to buy. The other impetus was the end-of-the-year rally which is very much feared by those under-invested or short. We said we were going to have to be nimble. We bought some bonds, and we bought some stocks this week. I expect the market to hold on here for the rest of 2023. I don’t want to chase but mid-month we should see some pullback. 2024 is going to be another story.

The economy is getting rough, and we still see a recession in the first half of 2024. It wasn’t just payrolls that disappointed this week: so did the unemployment rate, which rose to 3.9% from 3.8%, vs expectations of an unchanged print. Since recent lows in April, this measure is up by 0.5% points, effectively cementing the next recession per Sahm’s rule.

Regarding wages, we find more proof that the labor market bubble has burst, with wage growth in October just 0.2%, down from the upwardly-revised 0.3% in Sept and below the 0.3% estimate.

The markets are reading STAGFLATION.

Rally into Christmas and then the New Year brings changes. Cyclical bear and secular bull. I hope. Looking only for a fat pitch while trying to stay nimble and patient.

“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. 

Drip

“I suspect that this most sudden and even violent lurch higher in interest rates is going to test financial structures that came into being during the period of very low nominal interest rates.” -Jim Grant

Those financial structures are being tested. On Friday, financials were down 1.8%, while regional banks were down over 2% and close to their early 2023 banking crisis lows. The great frustration about this selloff is that the market is moving so slowly. Drip, Drip, Drip. The regional banks broke through their range and moved 20% lower. The Micro Caps have broken their range and are dripping lower. Microcaps, as judged by the IWC ETF, look like they will probably go down 20% from their most recent range low and are now halfway there. The latest to break down through their support is the small-caps stocks. They have just broken their range. Lower by 20%, I would say. The problem is the drip, drip, drip. It makes sense, though. While rates are dramatically higher which should send stocks lower, the government is shoving money into the system in immense numbers. Trillions. Measures of GDP. It makes no sense, but it keeps the market from plunging. 4000 is the new magnet for the S&P 500.

The S&P 500 is down 10% since the last Fed rate hike in July and down 9% since our Volatility signal went off in early September. The market is getting oversold and due for a bounce. 4000 is a huge support level. Water torture with stocks in negative gamma. That means there will be dips but also rips higher, which will scare some into chasing, followed by another move lower. Negative gamma has us inclined to watch for a reflexive bounce, which could get legs into the end of the year. It’s pretty tricky stuff here. Monday could be very interesting.

I see stock after stock and index after index repeating the same pattern. They all went higher after covid and are now sliding back down to their price just before covid hit. Coincidence? The post-COVID era was just a sugar high full of government stimulus, and that stimulus marches on. The good news? Corporations have had two years to increase earnings and buy back stock. That means their valuations are cheaper and thus more valuable to us at those same prices.

The hard part of the drip, drip, drip is that it makes it harder to hedge. Hedging has a time value that erodes with time. It basically costs you money the longer you hold it. It is making this environment very painful for some.

It is hard to stay on the sidelines, so we nibble. I still think we see some sort of tradeable low for bonds, but it is just drip, drip, drip. Year-end sentiment could easily take over in this negative gamma environment. Remember, it works both ways. Volatility up and down. Not just down. They could just as easily rip the market higher on little to no volume. We try to prepare for both.

“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.