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The Ivory Hill RiskSIGNAL™ is green, and any pullback should be viewed as a buying opportunity. The trend is more important than any single data point. Our short-term volatility signal is still red but is getting very close to flipping green after today’s price action.
For months, I’ve been warning about rising inflation, and today’s numbers re-confirm the trend. Headline US CPI climbed to 2.89% from 2.75% last month, and Core CPI (excluding food and energy) came in at 3.25%, just slightly down from 3.30%.
The headline figures are fully aligned with my expectations, showcasing a waning deflationary drag from energy, a sharp resurgence in food inflation, and a clear bottoming in core goods deflation, led by a rebound in used car values.
Despite this, markets are rallying on the narrative that inflation wasn’t "as bad as expected." Why? Because Old Wall Street, always late to the party, scrambled to revise their CPI targets at the last minute after completely missing the inflation trend. Bottom line is inflation is still gaining momentum, and I fully expect it to breach 3% by mid-year, if not sooner.
Looking ahead to January and 1Q 2025 in general, the outlook remains clear: the deflationary impact from energy is expected to fade further, food inflation will introduce new upward pressures, base effects in core goods inflation will ease substantially, and shelter disinflation is on track to approach an inflection point within 1Q25, consistent with the established 18-month lagged correlation to home values.
I expect next month’s CPI report, set to be released on February 12th, to show further acceleration, with inflation ranging from 2.91% on the low end to 3.10% on the high end and a base case of 3.0%.
Volatility
Dealers narrowly closed in positive gamma territory today at +5. If the SPX remains above the flip line at 5,939, we can expect reduced volatility in the days ahead. For more details on dealer gamma, check out last week’s report.
Positioning Update:
At the end of last week, we increased our exposure to BTAL as a hedge ahead of today’s CPI report. BTAL is one of my favorite ETFs to use during uncertainty. BTAL’s objective is to provide negative beta exposure to the US equity market by taking long positions in low-beta stocks and short positions in high-beta stocks, capturing the spread return between the two. I call it the “volatility dimmer switch.” As volatility rises, I increase exposure to BTAL to suppress portfolio volatility. This also allows us to benefit from the downside without taking an aggressive short position, only to get our face ripped off when the market rebounds.
Following today’s data, we’re reducing our BTAL position and reallocating our QQQ and QLD positions. Overall, we remain fully invested in this market.
As stated above, I expect the deflationary impact from energy to fade going forward, so we added a pilot position in Energy via XLE. I am looking to add to this position on red days.
I started the year bullish on bank stocks, but the California wildfires may change that, as I expect a surge in mortgage defaults to pressure banks like Wells Fargo and Bank of America. For now, I’m waiting for technicals to firm up and positive catalysts to emerge, though I remain confident that banks could still outperform by year-end, benefiting from deregulation.
January Market Multiple Update
Current Situation
Revised Valuation Metrics
2025 EPS Expectations: Reduced from $277/share to $270/share.
Market Multiple: Adjusted from a range of 21X-22X to a flat 21X.
Current Situation Target: Set at 5,670, down from December’s midpoint of 5,956.
Technicals
The current situation target of 5,670 is nearly identical to the mid-July record high of 5,669.67. This level served as significant resistance during the August/September market volatility and will likely act as initial support if stocks decline further.
History supports this: following the breakout in mid-September, the S&P 500 retested summer highs multiple times before achieving new records in early December.
A daily or weekly close below 5,670 would indicate substantial technical deterioration in the multi-year uptrend.
Better-If Scenario
Revised Valuation Metrics
2025 EPS Expectations: Reduced marginally from $280/share to $277/share.
Market Multiple: Adjusted from 22.5X to 22X.
Better-If Target: Set at 6,094, down from December’s target of 6,300.
Technicals
The better-if scenario target aligns with the December all-time highs of 6,090 (closing) and 6,100 (intraday). Until these highs are exceeded, they will serve as critical resistance.
Implication for Bulls: A breakout above these levels is necessary to validate continued bullish momentum in 2025.
Worse-If Scenario
Unchanged Valuation Metrics
2025 EPS Expectations: Steady at $260/share.
Market Multiple: Maintained at 17X-18X.
Worse-If Target: Remains at 4,420 to 4,680, with a midpoint of 4,550.
Technicals
The S&P 500 has not tested the worse-if range since early 2024. Historically, this range served as both resistance and support during the 2022 bear market and subsequent recovery.
A breakdown below the August low close of 5,186 could trigger a downside move to 4,371—notably 50 points below the lower bound of the worse-if range.
This range represents a critical technical level should the market enter a sustained bearish trend.
Technical Trends
Shift to a Downtrend
The late-December rally failed to breach the record highs, forming a lower-high on the daily chart.
By basic trend analysis and Dow Theory, this signifies a transition from an uptrend (higher-highs, higher-lows) to a near-term downtrend (lower-highs, lower-lows).
Contextualizing the Downtrend
While the short-term trend suggests increased downside risks, this does not signal the end of the long-term bull market. Similar pullbacks in H2 2023 preceded a robust rally driven by growth stocks.
Downside risks are at their highest levels since late summer 2023, warranting close monitoring of technical levels.
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
Schedule a call with me by clicking HERE
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President
Email: kurt@ivoryhill.com | ivoryhill.com
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