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RiskSIGNAL is Green: Markets Can Stay Overbought for Long Periods of Time

The Ivory RiskSIGNAL® is now green on a short, intermediate, and long-term basis and it is giving a firm buy signal. Our signal flipped green last week and has held firm over the last 5 trading days.

Unless there is some type of meaningful pullback under 3945 level on the S&P 500 then dips are buyable.

To be crystal clear, I am not calling a long-term bottom here. Market conditions are signaling that this rally could have some legs for the next 3-5 weeks and a lot can change in that amount of time.

The chart below shows our long-term signal. As you can see it does not flip very often so when it does, it is crucial that we stick to the process. A lot of money has been lost trying to perfectly time a bottom and market conditions are saying we should increase our speed.

The Ivory Hill RiskSIGNAL uses a proprietary quantitative investment signal to determine when we should be in or out of the market. This mathematical, non-emotional and repeatable process helps take the emotion and the noise out of the investment decision making process.

The chart below illustrates the dates when the RiskSIGNAL triggered a shift in asset allocations.

Kurt S. Altrichter
Kurt S. Altrichter

The updated numbers for the Ivory Hill RiskSIGNAL are as follows: when the RiskSIGNAL is green, it has a 72% probability of being right but it also has a 28% probability of being wrong. We are in the math game not the emotional guessing game.

We are currently sitting on 65% cash/money market (down from 70%). We also started added some small exposure to bond ETFs. We will be increasing exposure to both fixed income and stocks in the days ahead.

Our short-term and intermediate-term signals have been green for almost a month now. While the market is still a little over bought on a short-term basis, we are going to be deliberately and incrementally increasing exposure to stocks on down days.

What is fueling this rally?

1. Zero Days to Expiration (0DTE) Options

  • Last week on Thursday was the largest US equity options volume session ever recorded in history. 40 million call options were traded.

  • This is either a bubble or a mania, either way this is what is driving the tape.

  • When something that has never happened before is right in front of me, I take a tactical pause and just watch. That is why we did not dive head first into equities last week.

  • This is text book market manipulation and is illegal but regulators tend not to enforce their own rules until a lot of people lose a lot of money.

  • This party has been going on since late last year and is not showing any signs of stopping and is something I am monitoring on a daily basis.

  • I would bet money that in a few months, you are going to see "Options bubble" plastered across all the news wires but that is not today.

Kurt S. Altrichter
Kurt S. Altrichter

2. Technical indicators are showing a bullish trend

  • The S&P 500 is trading above its 200-day moving average (DMA). When the market is trading above above the 200DMA, market watchers who use technical analysis generally consider this to be in an overall uptrend and start buying stocks.

  • In like fashion, when the 50DMA crossing over to the upside of the 200DMA (golden cross), this is considered to be further confirmation that the market is in an uptrend.

  • A lot of money managers depend on these indicators as law so it is very likely that a lot of them are deploying cash into this market.

  • I monitor these indicators as a guide-post to get an idea of what institutions might be doing, but I do not consider them law.

  • Bottom line, traders and institutions are injecting capital into this market right now and that will likely support stock prices.

Kurt S. Altrichter
Kurt S. Altrichter

3. Market conditions are telling us that traders are getting more offensive

Below is a chart of the utilities sector divided by the S&P 500. Remember, this price ratio tends to be an early indicator of what direction volatility is going. When utilities are outperforming the overall market, that is an early indicator of increased volatility. When the overall market is outperforming the utilities sector that is an early indicator to expect lower volatility which is bullish for stocks and is what we are seeing today.

This is important because it is predicated on the wider concept that investors tend to seek out risk when market conditions are good and take risk off the table when conditions are poor. Within the stock markets, the utilities sector is generally considered the most defensive given that the demand for water and electricity should remain constant despite economic conditions. Since equity prices tend to be the ultimate leading indicator, seeing the utilities sector outperform the broader market could be an indication that traders see economic conditions deteriorating. Seeing underperformance in the utilities sector, like we are seeing today, means that traders and institutional investors are starting to take on more risk so this is signaling that lower volatility is likely.

Kurt S. Altrichter
Kurt S. Altrichter

4. Record levels of cash on the sidelines

With long-term treasuries down 31% from their all time highs investors have a lot of capital in the money markets and are eager to deploy it into equities.

Kurt S. Altrichter
Kurt S. Altrichter

In conclusion, after over a year of sitting in 60-70% cash, we are going to start layering into this market.

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 02.07.2023


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