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March Market Expectations Report

The Ivory Hill RiskSIGNAL™ remains green since December 5th. We are fully invested in this market.


This month’s report will look at both fundamentals and technicals.


The March update for the Market Expectations Table sends a clear message: The fundamentals remain solid, yet the market persistently reflects an optimistic outlook, leading to overvaluation when compared to historical and fundamental metrics. Consequently, there exists a continual risk of experiencing a quick 5% to 10% drawdown in response to minor negative news. It is imperative for all investors to recognize this reality in their portfolio positioning and risk tolerance assessment.



Changes from February’s report:


  1. Powell has strongly hinted at a June rate cut.

  2. The current situation’s market multiple increased from 18.5X-19.5X to 19X-20X.

  3. We added “AI Mania Enthusiasm” as a new market influence. The market expectations table is primarily focused on fundamentals as they are the primary drivers of market performance over the medium and long term. However, the notable enthusiasm surrounding artificial intelligence (AI) has emerged as a tangible bullish influence across all markets. Whether this trend persists or reverses will significantly impact stock prices.



Current Situation:


The current market landscape is characterized by several key factors:

  • The Federal Reserve has indicated a potential rate cut in June.

  • Economic growth remains positive, though not excessively robust.

  • Inflation is gradually declining.

  • Enthusiasm for artificial intelligence (AI) remains strong.

This overall positive backdrop has been instrumental in driving stock market gains since the beginning of the year. Factors such as solid growth, decreasing inflation, anticipated rate cuts by the Fed, and sustained enthusiasm for AI have collectively supported the upward trajectory of stocks year-to-date. However, it's crucial to note that despite these positive fundamentals, current market valuations appear stretched, rendering the market vulnerable to potential negative surprises to the downside.


Conditions Improve If:


Several developments could lead to an improvement in market conditions:

  • The Federal Reserve confirms a rate cut in May (unlikely)

  • Economic data maintains a Goldilocks balance, neither too hot nor too cold.

  • Core Consumer Price Index (CPI) and Core Personal Consumption Expenditures (PCE) Price Index show a faster decline in inflation.

  • AI-related earnings continue to demonstrate strength.

In this scenario, the positive macroeconomic environment for both stocks and bonds would be solidified, extending the market's reasonable valuation above 4,900. This would essentially create an optimal environment for stocks, characterized by imminent rate cuts, strong yet controlled growth, declining inflation, and robust AI enthusiasm. Although not fully supported by valuations, such a scenario could propel the S&P 500 towards and beyond 5,200.


Conditions Get Worse If:


Conversely, the market could face significant challenges under certain circumstances:

  • The Federal Reserve materially delays or rejects a rate cut in June.

  • Economic growth experiences a sudden downturn.

  • Inflation metrics, such as CPI and Core PCE Price Index, rebound unexpectedly.

  • AI-related earnings disappoint.

This scenario would undermine the assumptions driving much of the rally witnessed in Q4 and year-to-date. Given the stretched nature of the markets, the outcome could entail substantial declines in stocks, potentially erasing much of the gains achieved from October to the present. While this outcome may seem unlikely given the current positive outlook, it remains a legitimate scenario that warrants consideration, as it could materialize if economic data trends in an unfavorable direction.


Technicals


Last week, the S&P 500 index surpassed our measured-move target of 5,100 that I posted in December.


Using the same analysis, our next measured-move target is set at 5,946, using the weekly closing high of early 2022 (4,766) and the weekly closing low of October (3,586).


On the higher extreme, using daily closing extremes would give us a target of 6,016. Based purely on technicals, the path of least resistance is higher from here, but shorter-term Intermarket conditions are showing signs of deterioration.



Magnificent Seven


Last week, the Magnificent Seven (M7) rally experienced a slight slowdown but still managed to achieve a modest gain of 0.25%, surpassing the S&P 500's dip of 0.26%. Year-to-date, the M7 has shown strong performance, up by 24.84%. Both the RSI and relative strength readings compared to the S&P 500 reached new highs, confirming the recent upward movement on the weekly chart.



The Semiconductor Index (SOXX) outpaced both the S&P 500 and the M7 last week, recording a gain of 0.57% and bringing its year-to-date increase to 18.74%. Once again, the RSI and relative strength compared to the S&P 500 hit new highs, affirming the ongoing upward trend in 2024.


Interestingly, both the M7 and the SOXX exhibited "outside reversals" on their daily charts, indicating potential near-term exhaustion in the upward trend despite reaching new highs. Notably, the SOXX experienced a significant volume spike on Friday, suggesting strong conviction, while the M7 saw relatively low volume, indicating weaker conviction.

It's noteworthy that among the M7, only NVDA and META saw gains last week, while TSLA notably experienced a significant loss of -13.47%.


Where NVDA goes is where the market will go. If NVDA stubs its toe, the market will sell off.

We remain invested in bubble-cap tech as long as our signals are strong.


Near-Term Levels to Watch

During sustained periods of low market volatility, such as the current straight-line trend we have witnessed so far in 2024, monitor key support thresholds for possible market reversals or spikes in volatility.


Currently, critical levels to watch are 5,070, 4,995, 4,9875, and 4,790.



Small-caps

Small-caps have gone nowhere since 2021. For the market to maintain its upward trajectory, it's imperative for small-caps to break out over the course of months and quarters consistently.


A bull market cannot solely rely on the performance of a select few stocks. It requires broader participation, including less capitalized indexes and even profitless stocks with no earnings to follow. Thus far, such widespread participation has not been evident.


Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. - Bob Farrell

When new 52-week highs and lows occur within a relatively short span of time, it often results in the formation of a "broadening triangle" price pattern. This pattern is historically associated with investor uncertainty and a lack of conviction in the market.



Small-cap stocks have moved up on our buy list, yet small-caps will face challenges as long as interest rates remain elevated. However, this doesn't prevent us from buying them.


5-Yr “Real Yields” (TIPS) - WATCH THIS!

Real interest rates have a significant impact on the economy and markets across different asset classes. In general, as real rates rise, they become more restrictive on growth. On the other hand, lower real rates are more supportive of economic growth and are consistent with strength in the stock market.


Historically, crossing the 2% mark in real rates coincided with risk asset downturns over the past two years and throughout most post-WWII economic cycles.



Real interest rates continued to fall last week as the 5-Yr TIPS yield fell from 1.77% to 1.72% importantly adding distance from the 2% threshold that coincided with both the bank failure of early 2023 and the H2’23 selloff to the October lows in stocks.


Seeing real rates fall is bullish for stocks, until they’re not.


The second chart above shows how real rates tend to decline before economic downturns or financial turmoil. (GFC, COVID crash).



No one saw the COVID crash coming, so it is difficult to make any real comparative analysis, but one crucial difference between now and 2007/2008 is that credit spreads are currently near cycle lows; in the fall of 2007, they were at 52-week highs.


This suggests the risk of a similar 2008-type crisis occurring imminently is lower.


And remember - The one fact pertaining to all conditions is that they will change.


Feel free to use me as a sounding board.


Best regards,


-Kurt


Kurt S. Altrichter, CRPS®

Fiduciary Advisor | President

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