The Ivory Hill RiskSIGNAL™ remains green, confirming that pullbacks are buying opportunities. Our short-term signal is also green, but the mid-term volatility signal has turned red—often an early warning of larger moves ahead. This aligns with my 3-4 week outlook, where markets are likely to move sideways or lower leading into the March 18-19 FOMC meeting. While the broader trend remains intact, near-term caution is warranted.
Dealers are in a neutral gamma (slightly positive) position, meaning their hedging activities are unlikely to significantly influence market movement at current levels. However, this sets up a path-dependent environment where price direction will dictate dealer positioning. If prices rise, dealers could shift more into positive gamma, suppressing volatility and stabilizing the market. Conversely, if prices decline, dealers will be forced to sell into weakness, magnifying downside volatility. A break below 6,037 would be bearish.
Last week, I wrote:
Next week, on February 12th, I anticipate a hot CPI print between 2.95%-3.1%, marking the top for inflation. On March 12th, I expect a cooler print between 2.80%-2.86%.
And that is exactly what happened.
The Fed is in a tough position. The 100 bps rate cut last September now looks like a major policy mistake, making them even more cautious about future cuts. As I noted in last week’s report, I expect a cooler inflation print on March 12 (2.80%-2.86%), which should shift the market back into a reflationary environment. The challenge is the Fed’s backward-looking approach, which makes them prone to overreacting—first to this month’s hot CPI report and then again when inflation cools next month, leaving them exposed to policy whipsaws.
To be clear, I’m not saying they will panic and raise or cut rates, but Powell’s messaging to the market carries just as much weight as actual policy moves. What he signals in the coming weeks could be just as impactful as any change in monetary policy.
If the March 12 CPI report prints cold, as I expect it to, the next 3-4 weeks should offer strong buying opportunities in Tech, Financials, and Energy as the market transitions back into a reflationary environment. In the meantime, Consumer Staples, Health Care, and Utilities are likely to outperform, as investors take a defensive stance leading up to the inflation data and Fed meeting.
With 5 of the 7 Magnificent Seven stocks breaking trend, we exited our MAGS ETF position, raising cash to 10%. We’re ready to re-enter quickly if two more names recover. For now, AMZN, META, and NFLX remain strong.
Bitcoin futures have lost momentum since mid-December, despite briefly reaching new all-time highs in January. Last week’s price action weakened further, with Bitcoin breaking below its 21-day MA and repeatedly failing retests from below, closing near the lows. Its relative weakness against gold, after months of sideways action, has historically signaled broader market volatility and underscores growing uncertainty across asset classes.
Bottom line: Bitcoin is rolling over in early February, and risks of a bearish breakdown are rising. A drop below $91,000 could trigger a measured move decline toward $75,000—aligning with last year’s H1 highs that previously acted as strong resistance.
We’re maintaining our Bitcoin exposure through the IBIT ETF but will move quickly to exit if it breaks the trend. Overnight, Bitcoin showed a big deceleration in the rate of change, which is typically an early sign that we are about to break the trend. For now, I’m watching for a clear trend break or further deterioration on a rate of change, and today’s price action contradicted that, as both the futures and the spot price are trading above 98,000 as I write this. Ethereum, Soloana, Avalanche, and DOGE have all broken trends, so it would not be surprising to see Bitcoin follow.
Also, while I am not a big believer in seasonality, I do think it matters anecdotally to supplement a more robust analysis. February is typically one of the worst months in the market.
Key Takeaways:
The recent rally has been driven by real improvements but hasn’t changed the fact that valuations remain stretched and vulnerable.
While Fed rhetoric, economic data, and bond yields have been supportive, tariffs and AI headwinds have introduced new risks.
The market is trading well above fundamental fair value, leaving it exposed to a 5%-10% pullback on any meaningful negative catalyst.
Market Overview: What’s Changed in February?
The February update of the Market Expectations Table shows that the recent rally in equities has been fundamentally supported—but not enough to justify current valuations. Stocks have climbed on positive developments, yet the market remains highly sensitive to downside risks.
Emerging Risks:
❌ Tariffs: The trade war narrative has intensified, with new tariffs implemented (including a 10% additional tariff on China), injecting fresh uncertainty into the market.
❌ AI Enthusiasm Fading: The DeepSeek revelation has created new headwinds for the tech sector, a key driver of the S&P 500’s recent gains.
Bottom Line: The rally over the past five weeks has been supported by improved macro conditions, but the market remains expensive relative to fundamentals. While optimism can sustain overvalued markets for extended periods, this environment is fragile, and a 5%-10% pullback could materialize quickly if sentiment shifts.
Current Market Setup: A Mixed Bag
Goldilocks economic data: Growth is steady, but any deviation could impact sentiment.
10-year yield moving lower: A key tailwind for equities, but still volatile.
Tariff uncertainty rising: Constant trade war headlines introduce unpredictability.
Tech sector faces pressure: AI momentum is wobbling, posing a serious challenge to market leadership.
Conclusion: The market isn’t in bad shape, but it faces multiple headwinds that could trigger volatility. Investors should be prepared for sudden moves in either direction.
Scenarios: What Could Drive Markets Higher or Lower?
📈 Bullish Scenario: S&P 500 Pushes to New Highs
Markets could legitimately extend the rally if the following tailwinds materialize:
✔️ Fed stays on track for a rate cut in the coming months.
✔️ Economic data remains steady (growth at or slightly below expectations).
✔️ Tariff threats subside, reducing geopolitical risks.
✔️ 10-year yield declines toward 4.20%, easing financial conditions.
✔️ NVDA (Feb 26) earnings reignite AI enthusiasm, restoring tech leadership.
➡️ Outcome: A near-perfect environment for equities—strong growth, falling rates, trade stability, and renewed tech momentum—could push the S&P 500 to fresh all-time highs.
📉 Bearish Scenario: A Major Market Reversal
If key risks accelerate, the market could see a steep pullback, driven by:
❌ The Fed signals a pause in rate cuts (or worse, a potential rate hike).
❌ Economic data deteriorates—either an inflation reacceleration or a slowdown.
❌ Trump enacts broader tariffs, triggering fresh trade shocks.
❌ 10-year yield spikes back to 4.80%, pressuring equity valuations.
❌ NVDA (Feb 26) earnings disappoint, reinforcing concerns that AI enthusiasm was overblown.
➡️ Outcome: A complete reversal of the 2024 rally, with a sharp decline in the S&P 500. This would create an environment of:
1️⃣ No Fed support—or worse, the return of rate hikes.
2️⃣ Economic data volatility—suggesting either overheating or a recession risk.
3️⃣ Rising trade tensions and higher bond yields, dragging down valuations.
4️⃣ Tech sector under pressure, further weighing on sentiment.
While this scenario is unlikely, it cannot be ignored. If it plays out, it would lead to significant market declines, and investors should be prepared to adjust positioning accordingly.
Final Thoughts: Stay Vigilant
The S&P 500 remains overextended, trading well above fundamental fair value. While positive momentum has supported the rally, risks are building.
🔹 For now, the market is still in an uptrend, but investors should be prepared for heightened volatility.
🔹 A 5%-10% pullback is entirely possible—not a reason to panic, but a reminder to stay disciplined and manage risk.
🔹 Key catalysts to watch: Fed policy shifts, inflation data, tariff developments, bond yields, and NVDA earnings.
In this environment, it’s critical to remain flexible and ready to act quickly if market conditions change.
And remember - The one fact pertaining to all conditions is that they will change.
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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