A Bubble or Boom? Prepare for Either
Sept. 8, 2023

A Bubble or a Boom?

Most technical traders would agree that the S&P500 chart is currently indeterminant in its indication of market direction. It’s not clear whether August represents a “pause that refreshes” on the way higher or the start of a downward series of waves. The financial media consensus is that there is no consensus. CNN reports that Michael Burry, of ‘Big Short’ fame, just bet $1.6 billion on a stock market crash. Likewise, Bank of America strategists say “US stocks still face a pullback from the risk of a hard economic landing.” Conversely, The Wall Street Journal, Barron’s, The Motley Fool, and others, have been writing stories about “the new bull market.” I believe the elusive recession has been delayed by (1) economic buoyancy provided courtesy of the $Trillions injected into the economy by Congress and the Fed in response to the COVID-19 pandemic, and (2) the recent AI optimism that captivated investors imagination. JPMorgan strategist Marko Kolanovic recently noted, “While the economy’s recent resilience may delay the onset of a recession, we believe that most of the lagged effects of the past year’s monetary tightening have yet to be felt, and ultimately a recession will likely be necessary to return inflation to target.”
Figure 1. SPDR S&P 500 ETF line graph by month.
Figure 2. SPDR S&P 500 ETF line graph by year, 2017-2023.

StormGuardTM Indicates a Faltering Rally

StormGuard doesn’t indicate what investors should do but rather reflects what investors are already doing. StormGuard’s recent sharp downward move places strong doubt that a new secular bull market has begun and suggests that the market’s recent runup is simply part of an extended bear market rally.
Figure 3. StormGuard-Armor Composite Indicator.

StormGuard Falters. New Secular Bull Market in Doubt

Interest Rates vs. Sticky Inflation

“Sticky Inflation” rose sharply in the wake of the post-COVID $Trillions of economic stimulus provided by the Fed and Congress. The Fed responded by sharply raising interest rates to put a damper on the inflationary economy. Some economists have suggested that in past periods inflation was never quelled until interest rates were raised above the rate of inflation. Interest rates are still short of that mark.

Figure 4. Line graph from the Federal Reserve Bank of St. Louis. X-axis charts 2000 through 2023. y-axis charts Percent Change from One Year Ago. Red line on the graph charts Federal Funds Effective Rate, blue line charts Sticky Price Consumer Price Index. As of July 2023, Red is at 5.12% and blue is at 5.55755%.

Interest Rates vs. Sticky Inflation

M2 Money Supply Progress

The M2 Money Supply is the available spending money of individuals and companies. Immediately following the Covid Crash the money supply was increased by $5.5 Trillion and resulted in inflation (too many dollars chasing too few goods). Although the Fed had been working on reducing the money supply to be in line with the former trend, it is clear that they have halted “quantitative tightening.” Could there be a good reason to pause $1.5T of the Fed’s planned quantitative tightening during a campaign season?

Figure 5. Line graph from the Federal Reserve Bank of St. Louis. X-axis charts September 2013 through September 2023. y-axis charts U.S. Dollars in billions. The line graphed charts M2. As of July 2023, the value is at 20,902.7 (billion).

M2 Money Supply – Trouble?

Inverted Yield Curve Trouble

The yield curve is a plot of bond interest rates versus maturity years. It is said to be inverted when short-term rates are higher than long-term rates. In the plot (right) when the 2yr interest rate goes higher than the 10yr interest rate the chart goes negative. An inverted yield curve has been a reliable indicator that a recession will soon follow. Raising interest rates is like spraying water on the economy’s flames. Because of the cause-and-effect lag, by the time the fire looks under control, there has already been too much water sprayed. This makes it nearly impossible to avoid extinguishing too much of the economy’s flames.

Figure 6. Line graph from the Federal Reserve Bank of St. Louis. X-axis charts time from around 1975 to the present day. Y-axis charts percentage, from -3% to positive 3%. The line graphed is titled "10-year Treasury Constant Maturity minus 2-Year Treasury Constant Maturity."

Inverted Yield Curve – Trouble?

Four Market Valuation Measures

In the VettaFi article “Market Valuation: Is the Market Still Overvalued?” the author averages four different methods of valuing the US market. The simple takeaway from the chart (right) is that the market is similarly overvalued today as it was during the tech bubble of 2000. Mixing a 100% overvalued market with the possibility of a hard-landing recession could result in total losses in the -50% to -70% range. That would be a life-changing event for most of us. But hey, what is there to worry about? The AI tech boom certainly has legs enough to push it upward another 50% within a year… right?  See the Meetup below for a webinar about being prepared for the market going either way.
Figure 7. Source: VettaFi Advisor Perspectives, Data through August 2023. Line graph is titled: Average of the Four Valuation Indicators with standard deviations highlighted. Most recent value in 2023 is indicated at 103%.

Tech Bubble 2.0 – Trouble?

Although we can’t know with certainty today whether we are in “Tech Bubble 2.0” or the start of a secular bull market, we can simultaneously prepare for both by employing an adaptive investment methodology that self-adjusts to accommodate where the market does go. We’ll examine a few examples to illustrate how this works.

Patience, not panic! Rules, not emotion!

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May the markets be with us,

Scott Juds
Chairman & CEO of Merlyn.AI Corporation and President & CEO of SumGrowth Strategies

Investing involves risk. Principal loss is possible. A momentum strategy is not a guarantee of future performance. Nothing contained within this newsletter should be construed as an offer to sell or the solicitation of an offer to buy any security. Technical analysis and commentary are for general information only and do not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual. Before investing, carefully consider a fund’s investment objectives, risks, charges and expenses, and possibly seeking professional advice. Obtain a prospectus containing this and other important fund information and read it carefully. SumGrowth Strategies is a Signal Provider for its SectorSurfer and AlphaDroid subscription services and is an Index Provider for funds sponsored by Merlyn.AI Corporation. SumGrowth Strategies provides no personalized financial investment advice specific to anyone’s life situation, and is not a registered investment advisor.

Article by Scott Juds
Chairman & CEO of Merlyn.AI Corporation and President & CEO of SumGrowth Strategies

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