While October has traditionally been a spooky month for investors the only thing scaring investors this October was the huge gains in the stock market. October 2015 will go down as the best performing month for the S&P 500 in four years. I think that we all enjoyed the ride back up in October. The S&P 500 rallied 8.3% and followed through with more gains today to get the S&P 500 into the plus column for 2015. Those gains would be nice gains for an entire year – never mind a month! Whenever we get to thinking how much we have gained we cannot help but to contemplate the downside. We must always be on guard to temper our greed/ego just as much as we would concentrate on opportunity when fear strikes.
Be fearful when others are greedy and greedy when others are fearful. – Warren Buffett
While the S&P 500 has moved back into the trading range that it occupied in the first half of 2015 it that would indicate that, at the very least, the market is due for a breather. We believe that the current upside in the market is therefore limited and that a pullback is not only likely but healthy for continued market gains. We are concerned about the lag in Small Cap stocks and what that may indicate for the market in the near term. We saw an exciting rise in Large Cap indexes in October but their Small Cap brethren have not kept pace. Usually, that signals a weakness in the market as investors flock to the relative safety that Large Cap stocks provide rather than seek out the higher risk/reward paradigm of small cap growth. This anomaly could also indicate a near term change in direction of stocks.
The current general consensus is for the market to make further gains as the traditional Santa Claus rally appears into the end of the year. We believe that the October rally has brought forward much of those gains and further gains into the end of the year will be muted. We would expect the market to take a breather and settle into a trading range as we close out 2015. It is a little early to foresee what 2016 holds in store but given the volatility that we have since August of this year we believe that 2016 will continue in the same vein and be a volatile year. While higher volatility does not indicate a top for the market higher volatility does tend to appear in the last act of an aging bull market. We could be seeing a market that compares in time to the 1999-2000 market when the Federal Reserve was preparing to raise interest rates. We believe that 2016’s returns will be +/- 20% for the year. Not very exact or comforting but it does allow us to plan. That plan would include more and larger tactical moves than we have made in the recent past.
“What you saw in the third quarter of this year could well have been a harbinger of things to come over the next year or two,” Bruce Karsh, CIO and cochairman of Oaktree Capital Group said October 29 after the company reported earnings.
We cannot predict with 100% accuracy every move in the market but what we can do is try and profit by tactically allocating and hedging our portfolio in times of market stress to take advantage of market volatility. Investing is not a game of perfection but of managing the risk inside one’s portfolio. We do not jump in and jump out of the market wholesale. By divesting ourselves of overpriced assets and availing ourselves of opportunities when prices are low allows us to take advantage of the long term benefits that the math of compounding brings.
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.