Fall Is In The Air

As much consternation was shown this week the S&P 500 was only down 1.4%. While markets have slowly marched ever skyward since 2015, lulling investors into complacency, market internals seem to be breaking down of late and just in time for the traditionally weak fall season. Our friends over at Lucena Research are at the forefront of applying Artificial Intelligence and Machine Learning to investment decision making. Their note to us on Monday researched some market internals as they dug up some dirt on the recent divergence of the S&P 500 and the Dow Jones Industrials. Their research came up with 39 instances of this type of divergence in the last 17 years. According to their research, over the next year the S&P 500’s average drawdown was 8.5% with the bottom of the expected bearish move coming within 7 months on average.  Here is the link to their note. Brilliant stuff.

http://lucenaresearch.com/wp-content/themes/lucena-theme/predictions/8-7-17.html

Also showing the internal weakness of the market is that the market has grown increasingly narrow in its ascent. An article from CNBC this week shows that 20% of the S&P 500 is in correction territory. A “correction” is generally accepted to be when a stock has retreated more than 10% from its high. 200 of the 500 stocks in the S&P 500 are in correction territory including Amazon, General Electric and Exxon. The S&P 500 is up over 9% in 2017. It shows how narrow the rally in stocks has become. The article goes on to note that less than 60% of the Russell 3000 is trading above its 200 day moving average (DMA). The 200 DMA is the dividing line between being long term bullish on a stock and long term bearish. The market’s strength is slipping.

Things are starting to get interesting. The market rejected 2475 on the S&P 500 as that area still holds as resistance. The bulls need to get back in gear. We closed the most eventful week in months in the middle of our range. We still see support at 2400. The likelihood of an actual shooting war in the Korean Peninsula is very low but we have never seen diplomacy by Twitter. The bulls need to hold 2400. As a side note we do find it refreshing that the market is actually taking geopolitics into account. The biggest contributor to the downside move this week may have been the short volatility trade. Shorting volatility has worked for years but we have been noting that it is a crowded trade and traders were due to get burned. Those traders looking for cover may have made an outsized contribution to the swings in the market this week. Might be time to take some chips off of the table if you haven’t already.

 

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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 www.BlackthornAsset.com  or check out our LinkedIn page at https://www.linkedin.com/in/terencereilly/ .

 

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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