The Ivory Hill RiskSIGNAL is still clearly red, and we have built up an excellent amount of cash. As of today, we are sitting on roughly 70% cash. The market should run up to the 3800-3900 range on the S&P 500 before the selloff starts again. Some of these rallies are short sellers covering their positions. Look for the market to drop back down to the 3600 range, and if that area of support cannot hold the next likely support level is 3000-3100. The market can have some FOMO rallies in a bear market, so be patient and let the Ivory Hill RiskSIGNAL turn green so we can get a clear sign that the trend has flipped.
Our short-term signal flipped green for the first time since Valentine's Day. This is the first time we have seen any movement in our signals. Our rules dictate that our medium term and technical signals need to also be green in order to start dipping our toes in here. We follow a rules based system because it eliminates emotional decision making.
There are some great buys out there, too many to list here, but they are probably going to get even more juicy as the they trend lower. The amount of cash some of these public companies have on their balance sheets is astounding. What to do now? Be patient, sit on the cash we have built up, let the market tell us where the bottom is, and then we can layer back in, firing on all cylinders.
QUICK CENTRAL BANK UPDATE
I’m not telling you anything you don’t already know when I say the Fed has put itself between a rock and a hard place. While they made the decision to drop the Fed Funds rate to 0% at the beginning of the pandemic, the judgment to keep it at 0% until earlier this year after the recovery had already run its course is inexcusable. Powell waited to get every last drop of blood out of the market until inflation got so high that he was forced to start tightening.
As the Fed tightens into slowing economic conditions, there’s a high probability of diving head first into a recession. In fact, every single recession has come on the heels of Fed rate hikes. It's not a possibility, it's the historical track record. "This time is different" was said every single time. The S&P 500 is down 20% from its highs and multiple sectors, including the previously high-flying tech stocks, have massively underperformed. If the Fed’s primary objective is to fight inflation, it has a few arrows left in its quiver that can help stop the economic slippage.
The European Central Bank (ECB), even as it’s been absurdly hesitant to tighten conditions at all, might actually have found a happy medium. It’s finally stopped its bond buying program and is likely to begin raising rates for the first time next month. The problem with managing monetary policy for so many countries with a single interest rate is that it can deliver haphazard results. Some countries are in much better shape than others, and they don’t need the same level of economic support. That’s why it’s likely the ECB will reintroduce a new bond buying program but with a more decisive approach. Instead of buying bonds across the board, they will target asset purchases only for the countries that need the most help. In this specific instance, the ECB will likely be looking to help out the failing Italian economy.
This is an interesting approach. We can argue all day about whether or not central banks should be stepping in on every single financial challenge that these economies have. Targeting specific countries is certainly better than raising rates across the board. And, it has a good chance of boosting investor confidence.
Think of it this way. If you think inflation is the economy’s biggest threat right now, you could argue that the ECB will address that by finally raising rates and ending its liquidity program. If you’re worried that markets are falling and destroying trillions of dollars in the financial markets, you could argue that the central bank will backstop it's worst case scenarios and support both the economy and its assets. It's one of the most sound ideas I have seen from a central bank in some time.
We won't know the results of this strategy for some time. Plummeting investor confidence is perhaps the most pressing short-term issue. The removal of the economic safety net by central banks, coupled with their subsequent tightening at the wrong time, is a major contributing factor. If they begin selectively re-injecting liquidity and eliminate some of the tail risk from risk assets, it could set up the markets for a strong bounce.
Will Powell sing a similar song? Should he? The rumor mill has been discussing the Fed targeting a dollar range for balance sheet runoff instead of a hard dollar target. Targeting a range would allow them the flexibility to permit a greater runoff when conditions are more favorable, but maintain more liquidity in the economy when things are tight. It might be enough to allow the Fed to control inflation while also adding support and improving investor sentiment for the financial markets.
The Fed is publicly maintain their narrative of controlling inflation, but don’t be fooled into thinking that they will sit back and watch the financial markets tank. Only time will tell.
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.
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President