Barometer Capital

Correction, or something more sinister? $SPY $TLH

Screenshot 2018-02-05 14.21.27Screenshot 2018-02-05 09.27.21As of the close yesterday, the S&P500 has pulled back 7.8% from highs reached one week ago. Internally at Barometer the week before last we were discussing the extent that the market had become extended above its longer term moving averages and the possibility that we could see correction. As a potential trigger, we noted that the price of a Long Term US Treasury Bond had started to decline more rapidly due to strong economic and potentially inflationary data. Monday of last week, four of our short term indicators flipped lower signalling short term caution.

Last Tuesday morning the Barometer team executed S&P500 futures hedges covering approximately 50% of the portfolio equity exposures across the Barometer Private Pools and Funds in order to mute volatility. While it is never enough, these hedges have had a significant positive impact on portfolios this past week and allowed us to get to this today without having to sell winning positions which would trigger taxable gains.

Yesterdays market close, and the open today are being driven by technical factors that should clear over the next day or two. Bull markets are punctuated with short sharp pullback that shake out the latecomers. As most know, our view has been that we are in the midst of a secular (long term) re-valuation of developed market equities. It would be extremely rare for a bull market to come to an end from a Friday to a Monday morning with out any prior deterioration in our long term models. We believe that this volatility will clear.

Fundamentally, conditions remain positive. The earnings period we have just come through reflected the best quarter of earnings and revenue beats since 2008. The month of January saw the greatest number of upwards analyst earnings revisions since 2002. The employment picture continues strong and credit conditions show no signs of stress.

Screenshot 2018-02-05 09.32.41

We expect that the near term weakness and volatility is likely to clear over the next few days and potentially as soon as today or tomorrow and then markets are likely to resume an upward trajectory. We will update as markets unfold.

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