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. 

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. 

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. 

Bolt

We find ourselves once again in the realm of negative gamma, a phenomenon we’ve delved into previously. It’s worth noting that during most extended market selloffs, the majority of trading days exhibit this characteristic. But what exactly is negative gamma? Think of it as the moment when the market is most sensitive to external news and events. To draw a vivid analogy, picture the market as a spirited horse within a corral, with the corral symbolizing market positioning largely occupied by options traders. When the horse is contained within the corral, it may kick and rear without causing much havoc. However, there are times when the market stretches too far, which is akin to leaving the corral gate ajar. This doesn’t guarantee the horse will bolt if startled, but it does mean that if it does, it can run much farther than expected. Negative gamma essentially releases the horse (the market) from the corral, exposing the market to news events. This sell-off prompts options traders to scramble to keep up with the market’s movements, often resulting in compelled stock selling.

As the market experiences a period of sell-off, I want to reassure you that there’s no need for concern. We’ve been managing our portfolio strategically. The troubles in Palestine have the market on edge, and market participants are rushing to hedge buying puts, gold, and oil futures. Our emphasis on oil and gold has undoubtedly helped us out again this week.

Our investments in gold and oil have not only weathered the storm but have also provided us with a healthy return. Additionally, we made the decision to stay out of bonds for approximately a year, a move that has proven advantageous in the current market conditions. Furthermore, our substantial cash positions have been actively contributing to our financial stability, generating a solid and safe annual yield of 5.25%.

It’s worth mentioning that we are closely monitoring the bond market as we anticipate potential opportunities as yields approach tradeable levels. We are anxiously poised to capitalize on these opportunities. The bond market is acting as a governor on Congress’ spending. The monstrous deficit spending is causing a major pause in bond buying for investors. Our research leads us to believe that it is possible that we find a tradeable bottom in November 2023.

In the last several months, we have seen regional banks break down in price. In a very similar pattern, micro-cap stocks have broken down as well. Small-cap stocks appear to be next, followed by large-cap banks. Don’t worry too much. We don’t own much, if any, of those equity sectors, and our stock positions are quite light. We relish the opportunity to buy stocks at a discount. The pain trade for the last two months of 2023 would be if markets were to head higher and force investors to chase. Markets are oversold here, and we are inclined to dip our toe in and add to stocks, but this will probably be a temporary bounce, and we don’t see ourselves chasing wholesale until interest rates are headed lower.

The S&P 500 closed at 4224- down over 100 points on the week and ever closer to the all-important 4200 level. We are at an inflection point in the market, and it is decision time. 4200 must hold.  Small caps never got the bulls’ memo and are approaching a must-hold area as well. A breakdown there could send the Russell 2000 down another 20%. If small caps hold and the S&P 500 holds 4200 we will most likely rally into the end of the year. We are going to need to be very nimble here.

“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. 

Heroes

When I was a boy, I had the opportunity to meet one of my heroes, Willie Mays, the legendary baseball player. At that time, I was just 8 years old, full of excitement, and I eagerly ran up to him to ask for his autograph. To my surprise, he let the door slam right in my face. That encounter left me with a lasting lesson: Meeting your heroes can be a bitter experience. Over the years, I’ve had the chance to meet a few more of my idols, and for the most part, those encounters were enjoyable. Two of my favorite encounters were with Muhammad Ali and Jimmy Page.

Meeting Muhammad Ali was a fantastic experience, even though Parkinson’s had already taken its toll on him. I remember how his hands still moved lightning-fast when I put my own hands up to shadow-box with him. Jimmy Page, on the other hand, had an image of an enigmatic, guitar-playing figure associated with devil worship. However, when I met him, he couldn’t have been nicer. He was genuinely interested in the workings of the stock exchange and seemed honored to be there. He shattered my stereotype of him and came across as a gentle soul.

Unfortunately, one of my heroes, Jimmy Buffett, passed away last month, and I privately always wished that I would never meet him. I was afraid that meeting him would be disappointing. In the days and weeks following his passing, numerous tributes poured in, all echoing a common theme: Jimmy Buffett was exactly who he claimed to be. He was a man driven by a warm smile, a quick joke, or a long, usually hilarious story. In a single word, he was “happy.”

In recent weeks I have been inundated with people around me who just exude a positive attitude. One is my dad. I went up to see Dad last week as he wasn’t feeling so well. Much like Jimmy, my dad is the kind of person who cherishes a quick joke or a good story, and he’s always ready with a warm hug and a bright smile. Despite facing some challenges recently, he consistently maintains that unwavering positive outlook on life. His mantra? “One day at a time, kid.” I wish I had met Jimmy but with a dad like mine how can I be disappointed?

As we have written in the past, markets are assaulted by news every hour of every day. Why does the market move sometimes, and other times it is unaffected? It is all about positioning. Our proprietary signal that we have written about recently indicated that markets were not ready to handle a market-moving event, and we needed to batten down the hatches. When we get our signal we don’t know what the event is that’s coming. We just know that it is going to have an impact.  Our proprietary signal has flashed red twice in the last several weeks. That doesn’t usually happen. It’s usually one and done and volatility comes roaring back. Does the double signal something more ominous approaching? I guess we will find out. We’ve never seen it before.  

Fed chairs were out on their soap boxes this week talking about the market.  They all pointed to the soaring 10-year yields and term premiums as indicators that the Fed’s job of tightening monetary policy had essentially been done. In other words, they hinted that there might not be any more interest rate hikes in the near future. Why? Markets were going down. Markets heading south tighten financial conditions. It does the job of the Feds for them. This has led to the market’s anticipation of the first rate cut from the Federal Reserve, expected in June 2024. Conversely, if the market begins to head higher it will be back to work for the Fed and HIGHER rates.

For the last 40 years, we have been in a more deflationary environment. At the end of the rate hike cycle, investors had done well to jump back in and buy stocks. This time might be a little different. The historical data tells us that in an inflationary environment, we should NOT buy the last rate hike. As a note, the S&P 500 is down 5.3% since the last Fed hike in July. In an environment marked by inflation, it’s anticipated that the broader stock market may face struggles while commodities and precious metals are expected to flourish. We saw this on Friday. While the broader stock market was lower our portfolios were higher due to our heavy concentration of oil and gold.

We are watching the bond market tick by tick. The bond market is acting as a governor on Congress’ spending. The monstrous deficit spending is causing a major pause in bond buying for investors. Our research leads us to believe that it is possible that we find a tradeable bottom in November 2023. This could lead to a rise in the 10-year rates, approaching the 5.25% mark.

The troubles in Palestine have the market on edge, and market participants are rushing to hedge buying puts, gold, and oil futures. Our emphasis on oil and gold has undoubtedly helped us out this week.

The S&P 500 closed at 4327. 4200 is very important. We are at an inflection point in the market and it is decision time. 4200 must hold.  Small caps never go the bulls’ memo and are approaching a must-hold area. A breakdown there could send the Russell 2000 down another 20%. If small caps hold and the S&P 500 holds 4200 we will most likely rally into the end of the year. We are going to need to be very nimble here.

“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. 

Courage

Late this week we received news that a young man that we knew was in an accident and had passed. He was a friend of our sons when they were younger and it made me think back to a simpler time when we collected the kids each day from the bus stop. I think we always knew that he wasn’t long for our world. It was too constraining for him. Like a beautiful meteor streaking across the sky, he burned bright. He was a wonderful, kind-hearted boy full of energy with a penchant for thrills and danger. He rode motorcycles and climbed trees with a spirit I wish I could muster. He stepped to a different beat, but he did it with courage and a real sense of confidence that this was his direction. From time to time, we see these angels in life who leave us with big lessons. Be courageous. Follow your own path. Choose to be Happy. He chose his own path. He disregarded how others think and made this life his own.  These were things that we all know but to see it in others gives us courage to do it ourselves.

The market rose for the first half of the week in spite of the fact that PPI and CPI were higher than expected and crude oil hit $91 a barrel—all signs of a looming return of inflation. Unleaded gas is getting closer to the all-important and politically charged level of $4 a gallon. Industrial production and retail sales were both lower, indicating slower growth. It’s called Stagflation and it’s not good. A rally off those numbers made no sense until you realized that the market was just driving to 4500 on the S&P which was one of the biggest option positions.

Large option positions act as magnets during expirations and in the post-expiration period the market can disengage from those big round numbers. We have another opportunity for volatility to return next week. The expiration from Friday will probably help our indicator to go full red and the return of volatility. The market has been too quiet for too long. September and October are the time of the year we see volatility. Will 2023 be any different?

Since 1990, the week after the September triple options expiration, the market is down 79% of the time at an average of 1%. (Nomura). For now, our signal refuses to go entirely red. Maybe the market will cool off enough, and downside hedges will accumulate, which will cushion any news to come our way. We don’t think so. We will continue trusting but verifying our data. The market is due for a burst of volatility. We hope to take advantage.

“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. 

Trust but Verify

Last week I celebrated the fact that we were empty nesters. Other than the call I got from our youngest it has been a little too quiet. He called because his internet had not worked since he moved in. I have been getting hit with a daily $15 charge from AT&T because we are over the limit in our data usage. I called AT&T to discuss our usage and that perhaps there was a better plan. We currently have access to 30 GB of data per month to share. The associate on the phone told me that we could get a plan with 50 GB of data per month for $25 less. $25 LESS??? They hit me with $45 in charges in the last three days for 3 GB of data. I remember when we bought our first home in 1996. There was a rotary dial phone on the wall. It turned out that the 93-year-old woman that we bought the house from had been renting – RENTING- this phone from them for $20 a month for years! Does someone have Verizon’s phone number? I guess we can add this one to Reilly’s Rules. Trust but verify.

The proprietary indicator that we told you about last week is still flashing a yellow caution signal. We had several questions this week about it. What is it? What is it telling us? Our signal is telling us that the market is out of balance. It’s as if no one has bought insurance. If the house were to go on fire here, there is no one around to put it out. In fact, many players would need to sell if everyone is selling throwing gasoline on the fire. Mostly, we are concerned that systematic strategies with volatility control in particular, being too tilted to the long side of the market. Volatility is being priced too low which we believe to be an indication that insurance (downside hedges) is an afterthought. Our signal refuses to go red. Maybe the market is going to cool off enough and downside hedges will accumulate which will cushion any news to come our way. We don’t think so. We will continue trusting but verifying our data. The market is due for a burst of volatility. We hope to take advantage.

We are starting to think that the only thing holding up this economy is the money flowing from the government and Taylor Swift. The big four in Asia (China, Japan, Korea and Taiwan) are showing imports down 18% year over year (BofA). A higher US Dollar and higher US bond yields are having an effect somewhere. Higher US stocks will mean higher yields for longer. The thing is that most consumers and corporations have fixed rate debt. Higher rates could take time to have an impact. Meanwhile the immense fiscal spending by the US government is still pouring through the system keeping things float. The Atlanta Fed has a very good track record predicting GDP. Right now, they are seeing 5.8% for this quarter. That is a little too hot. That what happens when you have deficit spending of $3Trillion for three years in a row. Too much too fast. Eventually, this all goes bust. For now, the leaders of this market (technology) are ignoring the higher bond yields. They shouldn’t.

One of the best trades in 2023 has been selling volatility. That is like picking up pennies in front of a steam roller. We think the steam roller is about to have its day and volatility rises. We will know if the shift in sentiment has turned this into the beginning of a more prolonged bull market when the S&P 500 tests the 4000-4200 area. A short-term selloff of 9-13% would present itself as a healthy, burning-off of positioning too heavily weighted towards the bulls. A break of that area would indicate a re-test of the lows put in last October.

“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. 

Quiet

We are empty nesters again!! Yay! We moved the boys back into their college dorms last week. We are really becoming pros on this. We had Kevin moved in under the 2-hour mark. What a team! As much as I dreaded this the first few years, I must confess I really enjoy it now. We all know our roles, and we just click as a team. We were done moving Kevin in before 1130 in the morning and left for a nice lunch in town. We will miss the boys, but they will be back often, and we will end up in Athens to see some football games this fall, I am sure. But for now, I am enjoying the quiet.

You know I am a bit of a contrarian. I’m always hesitant to buy when others are buying and sell when everyone is selling. The proprietary indicator that we told you about last week is still flashing a yellow caution signal. Why is it flashing? Everyone and their uncle has sold volatility and gotten long stocks (and Short bonds). The S&P 500 is down just over 2% since it appeared on our radar. People ask me what’s coming? What is going to drag the market lower? What are you seeing?  We don’t know, and we don’t care. Our signal is telling us that whatever the news is, the market is not positioned to cushion the blow. Whatever the next news cycle brings, it should have an impact. Often, we get major negative news, it is just that the market is prepared for it. Just to be clear – our signal is not a get-out-of-the-market signal. It’s a reduce positions and perhaps buy some volatility signal. Here’s the thing. There is always a chance for news to move markets. It becomes impactful and moves markets if investors/traders are not positioned for it. That is what my signal is telling me. People are currently underestimating the market’s ability to move. People have been selling volatility, and it is time for the market to push back. I’m not happy that the market has sold off 2% so far because the market will move less when our signal goes red. I am in the – I hope we rally next week camp, but I have one eye on the exit.

During this week, I came across an insightful chart that effectively encapsulates my sentiments regarding the market’s trajectory over the long term. Anticipating the journey ahead, it becomes apparent that we are poised for a persistent and challenging path characterized by a continuous interplay of surges and setbacks. Why?  Inflation is going to come to us in waves. Not to say that we won’t make money, just that given the presence of inflation, it will be more of a trader’s market for the next 7-10 years. We will need to act quickly and decisively. (Credit Agricole)

One of the best trades in 2023 has been selling volatility. That is like picking up pennies in front of a steam roller. We think the steam roller is about to have its day. We will know if the shift in sentiment turns this into the beginning of a more prolonged bull market when the S&P 500 tests the 4000-4200 area. A short-term selloff of 9-13% would present itself as a healthy, burning-off positioning too heavily weighted towards the bulls.

“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.