Is This the Final Leg of the Bull Market?
What Historical Patterns Suggest About the Future of Stocks
The Ivory Hill RiskSIGNAL™ has remained green since December 5, 2023. Our long-term signal is strong, and the trend is firmly up. However, as we approach the election, I expect increased volatility to impact markets.
Investors welcomed the Federal Reserve’s decision to cut rates by 50 basis points during last week’s September FOMC meeting, pushing the S&P 500 to new all-time highs. This breakout signals a bullish trend for the broader market, and based on pure price action in the S&P 500, it suggests that the stock market will continue to climb. Additionally, several other cross-asset indicators point to the possibility of an ongoing rally in equities. However, I believe the number of historically reliable signals indicating that this is the final stage of the bull market outweighs the signals suggesting further growth beyond the next few months.
How High Can We Go?
The S&P 500’s breakout to new highs has set two measured move targets based on its recent consolidation pattern. Though the "Cup-and-Handle" is hard to spot due to V-shaped recoveries in August and September, it’s there. The first target adds the 240-point September pullback to the old high of 5,667, aiming for 5,907—just 3.5% above Friday’s close. The second target, based on a 481-point August pullback, points to a longer-term goal of 6,148, which is about 8% higher than the current level. Only time will tell.
The lack of confirmation for new record highs for the S&P 500 is still a major divergence that should not be ignored. Historically, this has preceded corrective volatility in markets seen in 2007, 2011, 2015, 2018, 2020, and 2022.
Lessons From Past Recessions - Four Technical Indicators to Watch
As I've been pointing out for some time now, this market has an 85% correlation with the summer of 2007. After analyzing the strongest correlations, I've narrowed it down to four key technical indicators that are critical to watch closely. You will see these charts in every report until these conditions change.
The VIX
During late-cycle phases, the VIX typically stays low, forming a pattern of lower highs as investor complacency sets in, with a growing number of short-volatility trades in response to resilient equity markets. Notably, each recent recessionary bear market has been preceded by the VIX reaching a 52-week high.
Recession Signal Triggered August 2nd, 2024
The Yield Curve
An inverted yield curve during an equity bull market should not be overlooked, but it’s also not an immediate reason to sell, as significant cyclical bull market gains often happen during these inversions. The key recession signal to focus on is rapid bull steepening in the 10Y-3M spread.
Recession Signal Potentially in Progress
Credit Spreads
Historically, credit spreads have been a valuable indicator for equity investors, as tightening often reflects strong risk-on flows into stocks and high-yield corporate bonds. However, a sharp widening to 52-week highs in credit spreads serves as a key warning sign of a potential recession.
Recession Signal Not Yet Triggered
S&P 500 Price Pattern
The S&P 500’s price movements can provide valuable insights into whether the market is approaching a cycle peak. As the last "domino to fall," a pullback in the index, followed by an unsuccessful attempt to reclaim recently set record highs, often signals a recessionary pattern seen at market tops.
Recession Signal Not Yet Triggered
A Look at the Bigger Picture
Taking a step back to evaluate the markets, it's hard to ignore the striking similarities between the current environment and the dynamics we saw in 2007. This parallel is particularly concerning, given that the Fed kicked off its rate-cutting cycle with a 50 basis point reduction on September 18, 2007—the same date as last week’s decision to cut rates by 50 basis points in 2024. Back in 2007, the market initially responded positively, pushing stocks to new highs before the S&P 500 eventually peaked on October 9, 2007, coinciding with the release of the Fed’s September meeting minutes. Interestingly, this year’s minutes will also be released on October 9th, which could serve as a potential market catalyst as we head toward the end of the year. It's certainly a date to watch closely.
Bottom line, it's foolish to go against the momentum of the 2024 stock market rally, which demands respect as we near Q4 with year-to-date gains approaching 20%. However, when taking everything into account, the likelihood of the market reaching a long-term top in the coming weeks or months and entering the early stages of a sustained bear market is the highest it's been in decades. The market’s resilience can continue, but eventually, the price action and data all suggest this bull market will come to an end in the not-too-distant future. Whether this shift occurs in the latter half of 2024 or the first half of 2025 remains uncertain. You can stay ahead of this by following our signaling process and by monitoring the four recession indicators above.
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
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Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President
Email: kurt@ivoryhill.com | ivoryhill.com