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The Macro Climate Looks Ugly, But Our Signal Remains Green

Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. - Bob Farrell

The markets are performing inline with our expectations. After a robust 10% rally in January, it was expected that there would be a pullback and a period of consolidation. Despite this, the S&P 500 is continuing its upward trajectory and displayed a positive bounce off the 200-day moving average last week.

Currently, we're holding around 50% cash/money market and 6% bonds. We are going to be adding exposure to equities as long as our signal holds up.

The Ivory Hill RiskSIGNAL update:

  • Short-Term Signal: Green

  • Intermediate-Term Signal: Red

  • Long-Term Signal: Green

  • Bond Signal: Green

As long as our signals hold firm, we will be adding exposure to equity ETFs and single stock longs on an incremental basis.

The markets are displaying an increasingly bullish sentiment, with three out of four signals indicating that it's time to take on more risk.

Traders are optimistic that the robust US economy can withstand the challenges posed by central banks, despite the Federal Reserve's aggressive tightening cycle. This optimism suggests that a possible recession could be delayed until at least 2024.

Only time will tell but if the Fed continues to raise rates, it is very likely they will massively overtighten.

Kurt S. Altrichter

Utilities had a slight edge over the market last week, suggesting a mild preference for defensive investments. While no particular sector has taken the lead, the trend towards utilities is gaining a little momentum. As anticipated, the considerable surge in growth in December and January is now giving way to a counter-reaction, which we're currently witnessing in real-time.

Kurt S. Altrichter

The $VIX is currently in the investable zone but only time will tell how long it stays there.

Remember, no bear market in history has ever bottomed without a VIX spike to 45+ but for now it is signaling risk-on.

Kurt S. Altrichter

The Macro Data Still Looks Ugly:

Last time I gave an update on our macro outlook, the data was telling us that we should be in an accelerating growth phase by Q3 2023 and that is still intact (for now).

As we approach phase III of this cycle, I want to set expectations of increased volatility and possibly a revert back to raising 70% cash again.

It's important to note that one can hold both bullish and bearish views simultaneously. It's about timeline. I am bullish right now but bearish over the macro cycle.

We will stick to our quantitative process first no matter what but over the next year or so I expect an ugly collapse in stock prices. Risk management and position sizing is more crucial than ever.


I mentioned at the beginning of this year that we are entering a profit recession and the data says that holds true. Although it is not reflecting the current market (yet), but we could be getting closer.

Earnings are inherently lagging indicators because they reflect what has already occurred, rather than what is yet to happen.

Looking at the image below, I expect continued declines in earnings for stocks in the industrial, energy, and utility sectors. This is because the most recent earnings releases for these stocks are based on pricing from Q3-Q4, which were impacted by several factors, including market volatility, supply chain disruptions, and inflationary pressures.

Kurt S. Altrichter

Using utility stocks as an example, natural gas prices ranged from $9-7 during Q3-Q4 2022 and sit at $2.65 today. This would undoubtedly affect the earnings of companies operating in the utilities sector. This is because the price of natural gas is a crucial factor in determining the profitability of many utility companies.

When the price of natural gas drops significantly, it can cause a decline in revenue for utility companies, as they generate less income from selling natural gas to consumers. This, in turn, can lead to a decline in earnings for these companies. Therefore, it's highly likely that we'll observe a greater number of declining earnings in this sector going forward.

Kurt S. Altrichter

Keeping an eye on earnings is important because a drop in earnings can trigger a credit event which will lead to a decline in asset prices. Earnings show how financially healthy a company is, and a decline in earnings can cause its stock to fall. This can result in a company being unable to meet its debt obligations, leading to a credit event.

Kurt S. Altrichter


Due to the debt ceiling crisis, Janet Yellen had to make some adjustments to the US financial system, such as "cashing up." This involved the US Treasury drawing down its cash balance by around $600 billion, which helped to support the liquidity of the US financial system. This move offset the Quantitative Tightening (QT) that has occurred in recent months.

However, this liquidity support has started to reverse over the last three to four weeks, as indicated by the red shading. This means that liquidity is declining once again.

Kurt S. Altrichter

The Yield Curve

This is one of the best leading indicators around. I am expecting the yield curve to invert from -89 basis points today down to roughly -95-105 basis points.

Remember, the historic sell signal is when this curve reverts on the way back up.

Kurt S. Altrichter

Same Day Options Casino

This bear market rally is largely being driven by same day options traders. On February 2nd, we saw the biggest call option buying day ever. Ever is a long time. February 2nd is also the exact same day we saw the S&P 500 make its YTD high.

Consider this for a moment - there is currently significant buying activity in options that expire within just six hours of purchase. The amount of leverage involved in such an option, which expires on the same day, can be quite substantial. In other words, traders who purchase these options are taking on a significant level of risk, as the value of the option can change rapidly and dramatically within a short period. This type of activity highlights the level of risk-taking that is currently present in the market. Oh and I bet this will accelerate to the downside as these traders operate on both sides of the fence.

Kurt S. Altrichter

I previously noted that I would bet money you will start to see "Options Bubble" headlines across various news outlets once the market begins to turnover. The reason being is that the substantial leverage involved in this type of trading activity, coupled with the limited liquidity available, is an unsustainable situation.

Phase III

As we move into phase III of the market cycle, navigating this period can be quite challenging due to the increased volatility that often accompanies this phase.

Therefore, it's crucial to be deliberate in our risk management approach and position sizing.

This will help to ensure that we're taking appropriate measures to manage risk and minimize potential losses, while still being well-positioned to take advantage of opportunities as they arise.

Kurt S. Altrichter

Phase III investing setup:

Investing during Phase III of the market cycle requires a strategic approach that takes into account the increased volatility and potential risks.

Gold is currently a favorable asset to own, not only in the current market but also to-and-through a potential recession. Those who have talked markets with me know that I don't view gold as part of a core asset allocation during a bull market because it can either neutralize returns or negatively impact the portfolio. It's just not a great long-term position to hold.

Kurt S. Altrichter

Now, to be clear, I am not inviting everyone to load up on gold just because I said so. While I may endorse a position, it's crucial to remember that market conditions can change quickly. Therefore, I may close out a position without warning if our signals change, as I have no allegiance to any specific ticker symbols.

Now back to the analysis: The real value of gold lies in the fact that it isn't strongly correlated or strongly negatively correlated to any major asset class, except for US Treasury yields.

What I'm looking at as a buying signal for gold is treasury yields. As the below chart shows, when the US10Y yield goes up, gold prices tend to go down, and when yields fall, gold prices tend to rise. As the Fed continues to raise rates, yields are likely to rise, which could lead to a dip in gold prices, presenting a buying opportunity.

You may ask, "Why not wait until the Fed stops raising rates if we know gold prices will go down?"

My response to that is that gold is currently bullish on both trade and trend and we are still very early in the cycle for gold so it's a good asset to own anyways. While we know that risk assets don't increase in a straight line, we can incrementally add exposure to gold when yields rise and trim exposure when yields fall.

Kurt S. Altrichter

Bottom line, when bond yields top out, the runway for gold should open up.

By the way, gold is one of those assets that we can stick with coming out of a declining growth environment and into an accelerating growth environment.

During the 2000s, gold's bull market began in the second half of the bear market.

Kurt S. Altrichter

The same goes for 2007-2008.

Kurt S. Altrichter

Looking at the big picture, the world is currently underinvested in gold. Both the US and China have experienced negative gold production since 2017, which strengthens the supply/demand dynamic for an investment in gold.

Kurt S. Altrichter

I have been bullish on both gold and gold mining stocks for sometime now, but I prefer gold bullion over miners because it has less beta exposure.

Kurt S. Altrichter

In conclusion, as long as our signals are green we are going to be buying US equities and adding to our gold position.

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 03.06.2023


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