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The Calm Before the Storm

The Ivory Hill RiskSIGNAL is still firmly in the red and we are sitting on 70% cash.

The market traded almost in lockstep to last week’s post, with the S&P 500 index rallying up to the 3,900 area before the short-sellers brought the market back down. Another reason for the rally was quarter end portfolio re-balancing by fund managers, but that should be done by the end of today, and we could see the market sell off even more. The 3,648 area on the S&P 500 is a key level of support. We could see the S&P 500 selling off to retest this support area, and if it is unable to hold then the next level of support is around 3,422 on the S&P 500.

I am expecting that the next week will show prices trying to stabilize, and we could possibly even see a minor bounce. However, the trend is bearish, and I do not think that Tuesday’s high of 3,945.86 will be broken before prices make their way down to challenge and possibly break the 3,644 level.

Bitcoin has been crushed, selling off from its high of $69,000 down to the $19,000 level this morning. If the low of $18,200 is broken, Bitcoin could sell off to the $12,200 level.

The VIX is still not acting the way it "should" given the "fear gauge's" historical habit of rising to new highs when stocks fall to new lows.

This is historically unusual, as one would expect increasing hedging activity as the market falls to new lows, unless the declines are “real selling” from pension funds and other long-term investors, as once they’re out of their equity longs, they have no reason to pay for downside protection via options anymore.

In order for a “capitulation bottom” to form, we would very likely need to see an explosion to new highs in the VIX amid some investor panic.

Bottom line: in order to call a bottom, we are going to need to see a true blowout in the VIX.

As I write this, the yield curve is sitting at 0.06 and is very close to inverting for the second time this year. If the yield curve inverts again, this is yet another sign of an inevitable recession.

Credit spreads look like they are finally blowing out. As I have been saying since 2020, once the line crosses the 4.50 level, it tends to keep going up and it seems to be following the historical narrative. In order to call a bottom, we need to see credit spreads blowout a little more than they are.

What should we being doing now? Nothing. We are going to be patient, sit on the cash we have built up and let the market tell us when it has bottomed, and then we will come back in firing on all cylinders.

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 07.01.2022


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