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Caution Advised! This Face-Ripper Rally Is Temporary

Missing the bottom on the way up won't cost you anything. It's missing the top on the way down that's always expensive. - Peter Lynch

The market has been trading up for the last two weeks, and I would expect this rally to continue for roughly the next 2-4 weeks. Our short-term signal flipped green on October 3 and has remained green since then, and historically, this signal usually lasts about 6-8 weeks.

In addition to our short-term signal being green, market conditions are telling us this rally could continue over the next month.

Over the last week, the total market cap of cryptocurrency increased by over $100 billion, more than a full month's worth of the Fed's Quantitative Tightening.

The utilities sector is the most "bond-like" sector in the equity markets and often classified as a defensive sector. The utilities sector has outperformed over the past six months but has been very ugly as of late. Valuations, which have been essentially disregarded throughout this cycle, could finally be unwinding. This sector currently trades at 20 times earnings, far higher than historical averages.

A rising price ratio chart means the numerator is outperforming (up more/down less) the denominator. As seen below, a falling price ratio means underperformance.

Lumber has picked up some momentum over the last month and has come down a little bit, most likely from being overbought. Lumber prices have risen about 12% from their valley at the end of September, suggesting that some of the worst market news may have been overdone. Long-term expectations should probably be low. The housing market is still rapidly rolling over, and high mortgage rates are pricing out a lot of new home buyers.

However, the overarching trend is still clearly down, and the markets will likely re-test the lows set in September. I expect Q4 earnings to be a lot worse than Q3 earnings, so we could expect to possibly see new lows in December and January.

Cash is king at this stage of the cycle, and we are sitting on roughly 75%-80% cash.

Patience is paying off and will likely continue to pay off. This bear market will end; we just don't know when.

The bond market is having the worst performance it has had in over four decades.

A lot of investors thought government bonds were safe. Well, they are safe if you own actual bonds and hold them to maturity, but if you own 20-year treasuries, you are down almost 37%, and it looks like they are going to continue to slide. We currently do not own any bond funds.

The reason why I bring up a possible continued rally is so you don't get caught up in the dumb money crowd. The dumb money crowd buys at the very top and sells at the very bottom.

Remember, in 2000, we had four bear market rallies of over 20% until we finally made a bottom.

Before you get influenced by the dumb money crowd, consider these four stats:

  1. 85% of countries are on track and are expected to have declining growth in two of the next three quarters. (i.e. for most of the world, growth and inflation are slowing).

  2. Every country but one globally has rising Credit Default Swaps month-over-month, with the average increase being +19% (i.e. the market is saying risk is rising).

  3. 83% of central banks are raising rates into declining economic conditions (FYI: raising rates into a slowdown = very bad).

  4. There is $13.4 Trillion of foreign dollar denominated debt (i.e. debt that has to be paid in US Dollars, with strong U.S. dollars and weak local currencies).

It's not exactly a bullish set up, is it?

The VIX ended last week at 25. We still need to see this blowout to 45+ as no bear market in history has ever bottomed without seeing the VIX blowout above 45.

We also still need to see credit spreads blowout higher and as of late they have only come down.

The yield curve is still inverted at 40 basis points. We still need to see the yield curve UN-invert because historically the market tends to violently go down after this happens.

The Fed is still raising rates. Based on history every single time the Fed raises rates, they go way to far and completely choke off economic growth. This time they are raising rates into declining economic conditions.

We still need the Fed to pause rates to start the next cycle of this bear market.

Regardless of what happens over the next month, we are going to stubbornly stick to our rules based investing process. We are going to sit on our pile of cash and take small nibbles at macro opportunities until the Ivory Hill RiskSIGNAL tells us where the bottom is. And we could be sitting in this position for a while yet.

Our macro forecasting model is telling us we could be sitting here until at least the second half of 2023.

And remember – the one fact pertaining to all conditions is that they will change.

Feel free to reach out to me and use me as a sounding board.

Best regards,

Kurt S. Altrichter, CRPS®

Fiduciary Advisor | President

Direct: 952.828.5336

—Written 10.30.2022


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