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May Market Expectations Report

The Ivory Hill RiskSIGNAL™ has remained green (since December 5th). Our short-term and mid-term volatility signals have been red since March, as evidenced by the recent stock sell-off. Even with the rally at the end of this week and yesterday, they both remain firmly red, so we still expect higher volatility moving forward.

We are still holding onto the cash from when we were stopped out of small-cap stocks at the beginning of April.

A new uptrend is potentially forming in small-caps following the stabilization of the last 2 weeks. Still, I would need to see 1) New highs in outright price, 2) Confirmation from weekly RSI, and 3) A breakout through the longstanding downtrend line in relative strength to the S&P 500 to be bullish on small-caps again. The market is still very narrow.

Wait, There’s More

A dominant theme in the marketplace over the past several years has been investors' persistent focus on quality, cash-flow-generating stocks. Why is that? Companies carrying high debt and slim profit margins may struggle to refinance their debt at higher interest rates. Many of these so-called zombie companies exist within the small-cap sector and are struggling for that reason. Their presence has acted as a drag, preventing the broader small-cap average (Russell 2000) from reaching its 2021 highs.

Small-cap stocks with high free cash flow have performed well, as evidenced by the Pacer US Small Cap Cash Cows 100 ETF (CALF).

Let's compare CALF, which represents high free cash flow small-cap stocks, with the Russell 2000 ETF (IWM), which includes a significant number of zombie companies.

The price ratio of CALF to IWM appears to have bottomed, and we may now be witnessing the early stages of the broader breakout in small caps. This suggests a shift in market sentiment, showing renewed interest in the small-cap sector as a whole and implying that investors believe these "zombie" companies could have a chance of survival.

Investors currently have a positive outlook on zombie companies, which is precisely what we want to see in a genuine bull market. In a broad-based bull market, these struggling companies need to gain momentum, and although this hasn't occurred yet, it appears we might be witnessing the early stages.

We're adopting a wait-and-see approach. Given the current market conditions, I have no problem being late to this party.

Defensive Stocks Are Still In Control

Despite last week's gains in the major indexes, underlying market conditions continue to deteriorate. The rally was driven primarily by the most defensive sector, utilities, suggesting that institutional investors are becoming increasingly cautious. This shift in sentiment should not be overlooked.

The utilities sector, represented by XLU, surged 3.35% last week, outperforming the S&P 500 by a factor of six and widening the gap between the last price and the 13-week moving average. Critical resistance at $70 is coming into view. The Relative Strength Index (RSI) reached new 52-week highs, confirming this upward momentum, while the sector's relative strength compared to the S&P 500 is nearing its 2024 high. If these highs are surpassed, I bet the old Wall Street analysts will upgrade the sector's outlook to "outperform."

Consumer Staples Are Not Confirming Utilities

The consumer staples sector, another traditionally defensive area, hasn't provided a confirming signal over the past year, and last week was no different. Although utilities are leading, the consumer staples sector continues to have trouble sustaining outperformance for longer than a week. This inconsistency creates mixed signals and does not indicate a major shift toward risk-off sentiment.

Last week, consumer staples stocks represented by XLP increased by 0.38%, slightly underperforming the S&P 500. The sector ETF stayed below multi-year resistance in the upper $70s but remained above its 13-week moving average, resulting in neutral price action. The RSI is positive and remains well above 50, although it has dropped since late March. Meanwhile, its relative strength compared to the S&P 500 has declined this year and continues in a downtrend channel that began in late 2022.

Bottom line: If consumer staples were outperforming as utilities are, it would raise more concerns. Since that's not the case, we shouldn't anticipate a major correction just yet.

The Magnificant Six

Earnings growth for the Magnificent six stocks has generally not been an issue. Although Q1 brought some mixed results compared to previous quarters, the impressive numbers from AAPL and GOOGL provide reassurance that tech giants are still thriving, suggesting that conditions may not be as dire as initially feared.

Relative to the S&P 500, the Big Six stocks dropped to a two-month low in April, highlighting a recent loss of bullish momentum. Additionally, the price-weighted Big Six index is nearing resistance from the 2024 highs between 2,300 and 2,400, which formed over a seven-week period. This level could serve as a significant technical ceiling for the Big Six in the coming days and weeks.

Bottom line: With how narrow this market is, it's difficult to envision the 2024 equity market rally persisting without the Big Six leading. If the uptrend from 2023 is broken, it would signal a significant bearish shift. Conversely, if the rally continues, it will likely propel the S&P 500 to new record highs.

We remain bullish on bubble-cap tech until our long-term signal flips red.

May Market Expectations Report

Despite last week's bounce in stocks, the May update of the Market Expectations Table decisively shows that market fundamentals have further weakened over the past few weeks. The S&P 500 remains overly optimistic, trading above 5,000. Throughout 2024, stock levels have not reflected the underlying market fundamentals, leaving the S&P 500 exposed to further declines if any adverse news impacts key market drivers.

The table underscores that the two dominant market influences—Fed Policy Expectations and Hard Landing vs. Soft Landing—have slightly declined. Starting with Fed expectations, Powell's indication that further rate hikes are “unlikely” has excited markets. Still, it's crucial to note that only a month ago, markets were expecting a rate cut in June. Now, a September rate cut is uncertain (and unlikely). The official Fed statement recognized a lack of progress on inflation and essentially confirmed a higher-for-longer rate policy. While Powell did not hint at further rate hikes, the fact that markets now anticipate only one or two rate cuts in 2024 is a negative shift compared to last month's outlook.

Turning to the Hard Landing vs. Soft Landing scenario, recent economic data is increasingly signaling a slowdown. The Q1 GDP report, ISM Manufacturing PMI, ISM Services PMI, and Chicago PMI all indicate a loss of momentum. Although the U.S. economy continues to show solid growth, it's now evident that signs of a slowdown are more pronounced than they've been in the past two years.

The other two key market influences—inflation and geopolitics—have both shown slight declines. Inflation remains elevated, particularly in the March Core PCE Price Index, the PCE Price Index from the Q1 GDP report, and the ISM Manufacturing and Services PMI price indices. Geopolitically, improvements remain limited, although a ceasefire in the Israel-Hamas conflict appears possible.

Finally, I removed "AI Enthusiasm" as a market influence for a clear reason: the market outlook has deteriorated and is increasingly uncertain. Just as macroeconomic headwinds overshadowed AI enthusiasm from August to October, we are witnessing a similar impact now, with AI headlines unlikely to sustain a rally. A more positive macroeconomic backdrop is essential for AI Enthusiasm to influence the market truly.

Bottom line: At its April lows, the S&P 500 approached the upper end of our "Fair Value" range, but it has since rebounded on Powell's less-hawkish-than-expected remarks, investor optimism around soft economic data, and lower yields. However, this shouldn't be mistaken for genuine fundamental improvement. "Not-as-bad-as-feared" news isn't equivalent to actual good news, a distinction emphasized in the Expectations Table this month.

The conclusion remains clear: Above 5,000, the S&P 500 isn't reflecting the current economic reality. Instead, it's pricing in a very optimistic resolution of macroeconomic uncertainties, leaving it vulnerable to further volatility. Any disappointing news related to the Fed, the economy, inflation, or geopolitics will lead to a 5% pullback, and no one should be surprised.

Current Situation:

  • Federal Reserve Policy: Fed isn't expected to raise interest rates imminently, but it's maintaining a "higher-for-longer" stance.

  • Economic Growth: Growth remains robust, but there are signs that momentum is slowing.

  • Inflation: The downward trend in inflation has stalled, and key metrics indicate inflation remains firm.

  • Geopolitical Risks: Elevated geopolitical risks persist, with no significant improvements observed.

  • Market Implications:

  • The current economic environment broadly supports stocks and warrants a high multiple.

  • Despite this, numerous negative risks could quickly shift the outlook in a more negative direction.

  • While the overall market setup remains positive, it is not as optimistic as the S&P 500 suggests.

Conditions Improve If:

  • Federal Reserve Signals: The Fed reaffirms a July rate cut, easing market concerns.

  • Economic Data: Data remains balanced ("Goldilocks" scenario) with steady, strong growth.

  • Inflation Metrics: The Consumer Price Index (CPI) and Core PCE Price Index come in lower than expected.

  • Geopolitical Risks: Tensions decrease, leading to a decline in oil prices and overall market stability.

  • Market Implications:

  • A near-perfect macroeconomic setup would emerge, characterized by:

  1. Imminent Rate Cuts: Higher market multiples as interest rates fall.

  2. Balanced Growth: Strong but not excessive economic growth.

  3. Falling Inflation: Reduced inflation alongside decreasing geopolitical risks.

  • This would create a favorable environment that could push the S&P 500 towards and potentially beyond its previous high of 5,200.

Conditions Get Worse If:

  • Federal Reserve Actions: The Fed dismisses the possibility of a September rate cut or openly discusses a potential rate hike.

  • Economic Growth: Growth sharply reverses direction, indicating a significant slowdown.

  • Inflation Metrics: The Consumer Price Index (CPI) and Core PCE Price Index continue to climb.

  • Geopolitical Conflicts: Regional conflicts emerge in the Middle East or Europe, exacerbating geopolitical risks.

  • Market Implications:

  • This scenario would challenge the underlying assumptions that supported the October-to-March rally.

  • Given current optimistic market pricing, this could lead to a substantial correction in stocks.

  • A reversal of the October-to-March gains could result in the S&P 500 falling to the mid-4,000 range.

  • While elevated valuations might suggest this outcome is unlikely, it's a legitimate risk to remain aware of, as a shift in economic data could quickly lead to this scenario.


The four most dangerous words in investing are, “it’s different this time.”

The market expects that the Fed will not raise interest rates further in this cycle. Is this actually bullish for stocks, as the market thinks it is? Simply put, despite common belief, Fed rate cuts are not favorable for the broader stock market. Historically, the average drawdown in the S&P 500 during the last nine rate-cutting cycles is 27%, with the most severe being the 56.67% peak-to-trough collapse during the Global Financial Crisis.

Capital preservation must be the priority for anyone managing money in 2024-2025. The media's increasing focus on AI and elevated year-end price targets for the S&P 500 contrasts with the declining attention to the yield curve. Given the notable and prolonged yield curve inversion and deteriorating long-term price action in the market, preserving your hard-earned capital should be your number one priority.

My clients are familiar with our signaling process, which aims to protect capital during market downturns. We will not hesitate to reduce equity exposure if our signal flips red.

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 S. Altrichter, CRPS®

Fiduciary Advisor | President


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