Lucy’s Football

Remember Snoopy, Lucy, Charlie Brown and the gang in the Peanuts cartoon? There is the classic scene where Lucy convinces Charlie Brown to trust her and that she won’t take the football away again when he tries to kick it. Well, Lucy took the football away again this week. We have for months seen central banks moving closer to tightening policy and for risk to rise in the market. While members of the FOMC have been out in public in the last few weeks promising tighter policy, Janet Yellen , Chair of the FOMC, went in front of Congress this week and whispered sweet nothings in the ear of the market leading to one of the S&P’s best weeks this year.

In previous communications Yellen warned of the high valuations and the risks that are piling up as asset prices rise. She communicated to markets that financial conditions are getting out of balance and valuations are elevated. Markets seemed to accept the anticipated rate hikes along with a decreasing of the Fed’s balance sheet. Why did “Lucy” backtrack?  Markets are not headed lower. They have only slowed their ascent. Why is she panicking? This tells us all we need to know. ANY move lower in markets will be met with panic from the Federal Reserve under current leadership.

However, while the S&P 500 is having its best performance in months, underneath the surface, markets and internals are diverging. Movements among the large indexes are no longer in sync. We are seeing the large caps rise while mid and small caps refuse to play along. By way of Arthur Cashin’s Letter this week comes a warning from Jason Goepfert of SentimenTrader.

The correlation between the S&P 500 and the three other major indexes is the lowest in 10 years as they each go their own way. This kind of behavior preceded the market peaks in 2000 and 2007, back-to-back up days for the (NASDAQ) Composite while new 52-week lows grew and outnumbered new highs. That has only happened three other times – October 18, 2007, May 18, 2011, and October 27, 2014. The first two preceded major corrections while the latter led to a choppy market that set new highs then gave all the gains back.  7/11/2017

It seems as every day that goes by we read about another big name in the industry warning about a major sell off in the fall of this year. That make us nervous and not how you think. We are anticipating a selloff as well in what we have dubbed our “1987” trade. We have seen plenty of people we respect come around to our thesis. What makes us nervous is that when everyone agrees something else tends to happen.

This week it was JP Morgan CEO Jamie Dimon’s turn.

Central banks would like to provide certainty but “you cannot make things certain that are uncertain,”

All the main buyers of sovereign debt over the last 10 years — financial institutions, central banks, foreign exchange managers — will become net sellers now. 

“That is a very different world you have to operate in, that’s a big change in the tide,” he said. “The tide is going out.”

Ray Dalio Took his turn at the pulpit as well. We can’t help but agree with Dalio as it has been our contention since the dawn of the crisis that central bank largesse would have to end and when it did we would find that pumping money in would be a lot easier than taking it out. You can always buy in markets. You can’t always sell. That’s when risk rises and rises substantially.

For the last nine years, central banks drove interest rates to nil and pumped money into the system creating favorable carries and abundant cash. These actions pushed up asset prices… That era is ending. 

Central bankers have clearly and understandably told us that henceforth those flows from their punch bowls will be tapered rather than increase…..central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn. Recognizing that, our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.

Oil seems to be holding above the lows of January 2016 above $40 a barrel. Oil can’t seem to catch fire at the moment and seems range bound between $40-50 a barrel. Any time prices in the oil patch rise more supply comes on the scene. OPEC members are cheating as usual and pumping supply into the marketplace. Keep an eye on financials. Financials and oil could hold the key here. If financials rally the market will run with them. There are only about six more weeks of summer. The tapering of the Fed’s balance sheet looks to be still on schedule to start in September. We believe the market will change when the flow changes. Things are scheduled to start flowing out in September. Equities are still in the middle of the new range on the S&P 500. For now we see support at 2400 on the S&P 500 with 2475 providing resistance.   

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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  or check out our LinkedIn page at .

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.


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