Manager’s Letter 2015 Q3

When I piloted airplanes, I taught my passengers how to avoid motion sickness. “Don’t focus inside the cockpit. Pick a distant stationary object like the horizon and fix your eyes upon it.” That’s well and good in clear weather when there is seldom cause for motion sickness.

I ended our first quarter letter by saying that the market can change “quickly.” I did not say “instantly.” The S&P 500 declined 12.5% peak to trough, 10.2% of it in four days. It then ran up 6.8% in three days, down 4.6% in two, up 6.2% in eleven, down 7.3% in seven, and up 6.8% in seven – six trips in 34 days. So what’s going on? And where are we going from here? For the former I refer you to our previous four Manager’s Letters.

The market had been correcting sideways all year as 2015 earnings growth estimates fell. Though I began reducing equity exposure on July 15th, the market’s sharp three-day drop meant adjusting strategy to selling into subsequent rallies. Cash levels have been raised and portfolios are positioned conservatively for my expectation of an S&P bottom in the 1600-1750 range, 1400-1600 worst case.

The market is now retesting resistance near the 2000 level. The Fed (FOMC) minutes come out tomorrow and earnings season will be in full swing next week. The correction could possibly end here, in which case, we will reverse course as well.

 
Warm Regards,
Sargon Zia, CFA
October 7, 2015

Note to reader: Published quarterly, the Manager’s Letter series primarily communicates the author and Chief Investment Officer’s personal opinion on the markets. This article was originally written in October of 2015 and is provided to offer continuity and context for future articles.

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