This market isn’t like any we’ve ever seen.
Money managers don’t want to miss out on the next leg higher.
However, there are three very clear signs that indicate this rally isn’t sustainable.
Let’s use this insight to our advantage.
Today, we’re going to present you with a market blueprint.
After we explain the three signals, we’ll show you EXACTLY how to turn this information into an actionable plan.
We want to start with the top two themes dominating today’s market.
Inflation & Recessions
In 1980, Paul Volcker and the Fed raised rates to over 15% to combat inflation. And it worked.
Demand tanked for everything, particularly oil, which was the biggest problem back then.
Raising rates that high drove the economy into a deep recession. But we quickly recovered.
Today’s Fed is attempting a soft landing with controlled inflation and a healthy economy.
So far, it appears they’re getting just that.
The latest jobs data spoke of robust hiring in the public and private sectors.
At the same time, inflation continues to slide.
Everything is awesome then, right?
Not exactly.
We’ve said the Fed will not achieve its 2% inflation target without a significant shift in housing supply.
They may be fine with something higher, say 2.5%.
After all, they don’t want to tank the economy before the election to hurt Kamala Harris’ chances, right?
However, this means we likely won’t see the final interest rates land near zero. Nor will the Fed cut them as aggressively.
Much of the current rally is pinned on lower rates. Most companies aren’t seeing much revenue growth or cost relief.
We’re seeing multiple expansions, where we pay more for the same stocks because the opportunity costs dropped.
If interest rates determine our opportunity costs, then higher rates means higher opportunity costs. And that means stocks imply deeper rate cuts than we are likely to see.
Stocks will fall once the market realizes this. But the market will need more signals from the Fed before this takes hold.
In the meantime, we can use the sector rotation to assess the health of the market.
Sector Rotation
This year’s rally came largely thanks to Nvidia and AI-related names.
Yes, it created a bubble, but not like you might be thinking.
Nvidia’s earnings and cash flow justify its price. The same can be said about Tesla, Microsoft, or any of the other Magnificent 7 companies.
While some of these companies are near new all-time highs, many are not.
In fact, the Nasdaq 100 hasn’t made a new all-time high since early July.
So, what’s helping to lift the markets higher?
Financials, industrials, basic materials, and utilities.
However, these sectors are rallying because they believe in the economy with the exception of financials.
Heavy demand for aerospace and defense is pushing industrials higher.
Basic materials are getting a huge lift from higher gold and silver prices.
And utilities are jumping because demand for AI and Cloud Centers is soaring.
Yes, there is earnings growth here. But not quality earnings growth.
It’s coming from inflation, government spending, and structural change in technology.
But you don’t have to take my word for it.
Let’s look at the last signal that comes to us courtesy of the big money.
Cost of Protection
We’ve talked before about the S&P 500 volatile index known as the VIX.
This index gauges fear in the market by looking at the demand for options on the S&P 500.
Since most of these are put options used to protect portfolios, a higher VIX means investors are paying more to defend their holdings.
Typically, this happens when markets drop. That’s why the inverse relationship between the VIX and the S&P 500 is one of the strongest out there.
But now, we’re in a pickle.
The VIX sits comfortably over 20 even as the S&P 500 continues to make new highs.
This happens VERY rarely and is almost always tied to a major market decline that either just happened or will happen.
There are no guarantees in trading and investing. But this is one of those things that holds true so often you’d be a fool not to listen.
With all this information at our disposal, how do we turn this to our advantage?
Turning Market Uncertainty into Financial Security
We’ve laid out the warning signs: a Fed unlikely to slash rates, sector rotations hinting at underlying weaknesses, and a rising VIX despite market highs. The signs are clear—this rally could be a mirage ready to fade.
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