The RiskSIGNAL Report: The Cash Buildup Continues As Bear Market Rallies Give Hope - Issue #6
Massive long-term outperformance is achieved through the avoidance of major market crashes.
I will be reaching out to you if I think a Roth Conversion makes sense for your situation. Down markets are a great time to take advantage of Roth Conversions because you can potentially save money on the conversion taxes.
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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 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.
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Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President