A Wobble?

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by: Terence Reilly

We thought that there could be more selling in store and, unfortunately, we were right. We saw that a break below the 200-DMA would set off the selling programs from quant funds and momentum players. The machines are still in charge here. It all seems quite calm and structured. In fact, the whole process has seemed devoid of emotion and devoid of, what we would deem, capitulation selling. We hope that changes. If we don't get capitulation selling, we may be stuck trading around this range for some time. We noted last week that we are in the middle of a very large trading range and that range stretches from 2550-2880 on the S&P 500. The S&P closed on Friday at 2658. If we test the lows of 2550, it could set up for some sort of capitulation selling and a tradable bottom.

For now, we see 2550 as support with the 2350 area on the S&P 500 as second support. This has been a sharp move off of the highs and markets are heavily oversold. We would expect some push-back by the bulls but we think that investors will be sellers of a bounce-back into the old highs of 2880-2900 in order to raise cash. Trader's lore would have a bounce on Tuesday around 11 am. Turnaround Tuesday anyone?

You may have noticed the large focus on technicals this week. When markets are in "risk off" mode all traders have to fall back on is the technicals. It shows traders where support may be as investors try and free up capital. We fell back below 2666 again last week. We have been noted the interesting struggles of the market since its lows of 666 in March of 2009. We have struggled at 2x, and 3x the lows of 666 spending 9-18 months at those levels to digest those gains. The level of 2664 is 4x the low of 666. It is too small of a sample but interesting to note. It has been 10 months since we blew right thru 2666 back in 2017 and it was then that we noted that each level has taken 9-18 months to digest the bullish move.

There is a fantastic article in Barron's this weekend by Lawrence Strauss who interviewed Howard Marks from Oaktree. We are constantly praising Marks in our blog and have enjoyed his recent book on cycles. If you have time - get it. If not, take a look at the Barron's article. Here are the highlights. Marks says that we are no longer in an "optimistic phase of the market." By that, Marks says that investors' perception has swung in the opposite direction. People have switched "from only seeing the good to only seeing the bad."

"It could be the start of a down market or it could just be a wobble." - Marks

At this point we would vote for wobble. At Blackthorn, we don't see a near-term recession on the horizon (the next 18-24 months) but we have been forecasting more of a 1987 style hit to the market. A quick bear market rather than a long drawn out affair. That doesn't mean that a recession couldn't hit soon thereafter. A recession would drag markets lower for longer.

I still think it is time for defense, predominately. I would worry more about losing money that I would about missing opportunities, and it is time for caution. - Marks

Investing is not easy…one of the real keys is to keep your emotions under control. Everything in the environment conspires to make us do the wrong thing, to buy when things are going well and prices are high- and to sell when things are going poorly and prices are lower, which is the exact opposite of what we should do. - Marks

We think that most investors agree with Marks in that it is time to be a bit more cautious and that a rally will be met with risk reduction. The old highs are resistance for now. The markets will stop panicking when the central bankers start panicking. The Fed is raising rates into the slowdown and may be creating the slowdown. When they stop tightening investors will come back.

The market rally in the post-Trump victory period has been a bit of too much too fast. We would not be surprised if markets gave up all of the post-Trump victory gains in the next 18- 24 months and be healthier for it. We are on guard but looking for opportunities in the maelstrom. The market needs détente or at least a thaw in China - US trade war. Trump and Xi will meet on the sidelines at the G 20 Summit at the end of November.

Keep your fingers crossed and look both ways. We are glad that we reduced risk in front of this rout. We will be looking to put some back on if markets can hold at the levels we discussed. Make a list of your favorite stocks. There are some decent values out there. We haven't seen that in a while. The market could fall 20% (2350 on the S&P) and still only be back to where it was in early 2017. The Trump election night lows were at 2040. Keep that in mind.