"Kip's VRA financial newsletter is a MUST read for every saavy investor in this country. Disregard it at your own peril. His mantra is my mantra. Kip Herriage's newsletter is my financial Bible."

--Wayne Allyn Root
2008 Libertarian Vice Presidential candidate
Author, "The Conscience of a Libertarian"

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Twitter: @kherriage

Friday
Jul202018

Q2 Earnings Not Disappointing. Investor Sentiment Buy Signals. Oil and Energy Stocks Getting Cheap. November Mid-Terms, The Bears Greatest Hope.

Second quarter earnings are beating estimates, across the board. Roughly 9% of S&P 500 co’s have reported and something like 80% have topped analyst estimates. While this is not unusual, the following is; fewer than 5% of co’s that have reported have tamped down Q3 earnings estimates.

So far, so good. Banks are beating and their share prices are rising (a good tell). We see the same action, most everywhere we look. Remember, should S&P 500 earnings growth come in at 20% (or better, as expected), it will mark the first back to back 20% earnings growth quarters since 2003 (the same year the VRA was founded). With a forward P/E multiple of just 16, you don’t have to love this market but you can no longer say that “it’s expensive”.

What does this tell us? I believe it tells us that Q2 will be another 20% growth quarter. I also believe its telling us that GDP for Q2 will top 4% “easily”…the whisper numbers are now above 5% GDP.

Think about this for a second; if the bears cannot knock the market lower during “sell in May and go away”…or “during the worst 6 month seasonal period of the year (May-October)…or while the MSM is obsessing about “Trump crashing the global economy with his trade war”, then how will the bears knock the market lower during Q3 and Q4, as the US economy finishes the year with full year GDP of 3.5%+ and full year corporate earnings growth of 20%+?

Yes….we are seeing some bears throw in the towel…but we’re still not seeing it in investor sentiment surveys. Below are this weeks AAII Sentiment Survey and CNN/Money Fear and Greed Index.

AAII shows bulls at just 34%, bears at 24% and neutral investors still at an enormous 40%. Once again, this is not how bull markets end. Bull markets end in wild euphoria. Not to worry…..we’ll get there…when the DJ is topping 40,000 and bulls are hitting 70%, we’ll know that things have gotten frothy.

 

Same with CNN/money Fear and Greed Index, which has just a “neutral” sentiment reading. How remarkable that we’re getting near weekly all time highs in nasdaq and Russell 2000 but investors remain hyper skittish? As a contrarian, we know what this means….pullbacks must be bought.

 

 

Heads up on VRA System Readings. Still at 10/12 screens bullish but note that the S&P 500, DJ and Nasdaq are trading at “extreme overbought” levels. Russell 2000 still has room to run. Not a reason to sell anything…but extreme overbought readings can lead to quick, albeit short term sell-offs.

Energy, Oil Update

In running VRA System Screens this week, one primary sector popped up as interesting…oil and energy stocks, most notably, West Tx Intermediate and oil service stocks (OIH).

Long time VRA Members will remember that we were bearish on oil from +$100 back in 2014…we stayed bearish all the way down to the $27 range…then we became bullish at $32/barrel. We’ve remained bullish since and most certainly so today.

Take a look at this 3 year chart of WTI. From our buy signal at $32, oil is up more than 100%. But its the current rising wedge pattern that has my attention today. The move higher over the last 12 months has fit neatly into this rising wedge, meaning that each time the lower line is hit, oil must be bought and that each time the upper line is hit, oil should be sold. Today, oil is right back to its lower line…its hitting heavily oversold levels on our momentum oscillators…and its next move higher should take oil to the (higher high) of $78–80, with $100/barrel possible in 2019.

 

Of the broad energy market sectors that look the most interesting, take a look at the following 1 year chart of OIH, or the Oil Services ETF. OIH meets the very definition of a VRA System Buy Signal. A series of higher highs and higher lows (as seen in circles below), combined with rising technical trend lines across the board (hyper bullish) along with a current test of the 200 dma. Should stochsastics reach extreme oversold levels, OIH would hit a “perfect” buy signal. I’ll have potential targets soon. We will only act if we have the potential for 30–50% gains in a leveraged ETF or 100%+ profit potential in an individual company. Watching this group closely.

 

 

Economics Concerns

Finally for this morning, and we get this question often, what’s the biggest short term negative event (domestic) that could take place that would derail our US bull market. There’s not a close second in my mind…it’s the November mid-terms, in less than 4 months. Should Dems win back the house and/or senate, we almost certainly know what their first steps would be. In addition to trying to impeach Trump (not sure what exactly the charge would be, but it wouldn’t stop them from trying) along with an attempt to eliminate/reverse Trumps tax cuts.

While it’s highly unlikely that they could muster the votes for either, trust me when I tell you that the markets dislike uncertainty more than anything. An impeachment trial and tax hikes would be enough to send our markets 20% lower. I have little doubt about this. It’s our biggest short term risk…not a close second.

Dems appear dead set on dying on the hills of Russia and illegal immigration. It’s my continued view that they stand little/no chance of winning back either the house or the senate. I look for R’s to increase their advantage in each chamber, and with this, US equity markets to rock and roll into year end. Our biggest short term worry really is not much of a worry.

Until next time, thanks again for reading…

Kip

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Friday
Jul132018

We have Seen This Movie Before. Hedge Funds are the Worst. Trade War Hysteria, Investor Sentiment at “Extreme Fear”. Buy Buy Buy!

Good Friday morning all. Over the years, we’ve seen this movie before. We’ve seen it many times.

Remember the global market hysteria surrounding Greece potentially leaving the EU, where the Euro and European banks would crash, taking the worlds economies with it. Or the untold fears surrounding Brexit (Greece part 2). Or Trump winning the election, which would pretty much be the end of the world as we knew it, according to the superior breeding/intellects of our East Coast/West Coast liberal elites.

In just the last few years, each was a looming catastrophe. The downside was so massive that hedge funds (run here in in states by those same East Coast/West Coast hyper-pompous elites) liquidated their holdings and then went aggressively short stocks, where they would book massive profits as the markets collapsed…while the rest of us saw our investment holdings steamrolled by their vastly superior intelligence and stock market expertise.

But something funny happened along the way…each movie ended just a bit differently than the elites had predicted. Greece remained in the EU and the markets rallied sharply higher. Brexit took UK stocks to record highs, in back to back years. And the Trump victory has, to date, equated to more than $6.5 trillion in US stock market gains and the strongest US economy in decades.

Folks, there’s a reason that hedge funds lose to the equity indexes, year after year. Instead of being the smart money, 90% of hedge funds are routinely beaten by index funds, supported by data going back 3 decades. Here at the VRA, we like to take the flip side of the hedge fund coin. If hedge funds are overwhelmingly bearish (as they have been since the election and as they remain today), then we’re going to be overwhelmingly bullish. If this logic sounds too simple, it’s because it is. The KISS principle absolutely applies to a) the majority of investors (which is why I am a contrarian) and b) to hedge funds.

What’s the movie today?? It’s “trade war hysteria” of course. The “dumb money elites” are positioned for a global economic and stock market collapse. But we know better. At worst, its a trade hiccup (certainly at this point), as evidenced by new all time highs this week in Nasdaq and Russell 2000. Each trade war sell-off is smaller and smaller…meaning that the move higher directly ahead should rock and roll.

We’ll “keep it simple, stupid”, and continue to use their investment mistakes to crush Mr. Market, year after year.

Consider the following, most excellent piece from market pro Joe Fahmy. The VRA is a big believer in following investor sentiment, which we discuss here regularly. Fahmy gets into a number of important sentiment readings, each which continue to point to “extreme fear” in the markets. It’s this exact “wall of worry” that will send US/global stock prices sharply higher.

https://www.marketwatch.com/story/extreme-fear-will-actually-keep-the-us-stock-market-grinding-higher-2018-07-12

Trade War

Wednesday’s trade war related hysteria (its not a war…don’t believe the fake news) resulted in DJ losses of just over 200 points, breaking up a 4 day rally that took the broad markets higher by 3% and sent the Russell 2000 to another fresh all time high. We believed that Wednesday’s decline was a buying opportunity.

The key point above is that (in addition to Q2 earnings reports kicking off) share buybacks will be allowed to resume, following SEC imposed blackout period of 4 weeks. The importance of share buybacks cannot be overstated. While impossible to quantify, I’ve heard it said from numerous sources that I trust that in just the last 8 years (this decade), at least half of all stock market gains have resulted from share repurchase programs. Granted, companies would not be buying back their own shares if they were not also making truck loads of money…but the fact remains; buybacks have absolutely helped to send US equity markets higher. A lot higher.

We’ve discussed the following chart a couple of times this year. With buybacks about to resume in earnest, its a good time to focus on it once again. This year, US share buybacks are projected to top $840 billion, or more than 20% greater that at any point in history (2006).

Remember, as shares are repurchased by the parent company, the number of outstanding shares is reduced, which has a direct affect of increasing earnings per share (while decreasing the price/earning multiple). In addition, the economic laws of supply/demand tell us that when increasing levels of demand (new share purchases) meet a decreased level of supply (outstanding shares reduced via share buybacks and M&A activity), share prices “must” rise. As you can see below, through share buybacks alone, stocks prices are set to soar for at least the remainder of 2018 (and most likely into 2020). Supply and demand, hard at work. How the perma bears continue to miss this most important macro point I have no clue.

 

Weekly AAII Investor Sentiment Survey

Last week, as bears outnumbered bulls by some 11 points (how remarkable was this!), we talked about the move higher that was almost certain to take place. How amazing that the broad markets have created more than $6.5 trillion in new wealth since the election, with US indexes near all time highs, yet just last week bears greatly outnumbered the bulls. Again, as contrarians, we knew exactly what this meant…”if you’re not long, you’re almost certainly very, very wrong”.

This weeks survey is out and we see a BIG reversal in the readings (no surprise there), with bulls now at 43%, bears at 29% and neutral investors at a still large 27%. My thoughts today? As the second half rally picks up speed, look for bullish readings to get back to the 55–60% levels…likely surpassing 60% as the markets finish off the year with a bang.

Until next time, thanks again for reading…have a great weekend.

Kip

2400% in net profits since 2014 while beating the S&P 500 14 of 15 years since our formation in 2003

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Friday
Jul062018

VRA Market Update, Rock Solid June Jobs Report, Trade Wars, and Technical Analysis; Buy the Rumor, Sell the News.

Good Friday morning all. Hope everyone had a a great July 4th holiday!

Employment data for June was just released, showing the US economy and jobs market continues to grow at an expanding pace. 213,000 jobs were created, beating the estimates of 195,000. In addition, April and May were revised higher by 37,000 jobs.

But here’s what you can count on seeing in the financial MSM today; the unemployment rate ticked up from 3.8% to 4% and while wage growth was a positive 2.7%, it missed estimates by a whole .01% (2.8%). Again, look for our Trump bashing MSM to focus on these most minor of negatives from an outstanding jobs report.

Just an fyi, the reason the unemployment rate rose to 4%? Americans are re-entering the labor force…once again looking for jobs that many had given up hope of finding again, in years past. A stronger labor force participation rate can equate to (in the short term) a slightly higher unemployment rate. This is a good problem to have. Bottom line; the US economy continues to point to highly positive GDP growth. This is not the scenario where stock markets reverse course.

US equity futures have rallied on the news. DJ futures were -90 before the report and now have been flat or slightly up since the open. If you’ve heard our end of day podcasts the last two days, you know that we’ve been laser focused on the markets internals (http://www.vrainsider.com/podcast). On Tuesday, even as the Dj plummeted in the close, finishing down 130 points, the markets internals remained highly positive. This told us, based on the VRA Investing System, that we should expect a bounceback in yesterdays trading. We got exactly that, with all 4 major indices closing sharply higher. Our market leaders continue to be the Nasdaq and Russell 2000, with both closing more than 1% higher. Remember, when the Nasdaq and Russell 2000 are leading the way, the rest of the market is almost certain to follow (this is backed up by historical market statistics that we’ve been covering a great deal in the past several weeks.

Here are yesterdays market internals. Advance/declines 2.3:1 positive. Volume 2:1 positive. New highs/lows 2:1 positive. The VRA System pays close attention to the internals, just as my mentors taught me some 30 years ago. The internals tell us the foundational strength/weakness of the broad markets and while I cannot back this statement up with hard data, I can say that from my memories, I cannot remember a significant market reversal having taken place when the internals are as rock solid as they’ve been….most certainly not with 40% of the worlds primary equity markets trading below their 200 dma. The US markets continue to be the place to be. I look for a second half rally in the Dow Jones and S&P 500, as they play catch-up to the Nasdaq and Russell 2000).

 

Over the last couple of months, one of the most commonly received questions to our office has been about fears of an inverted yield curve (when 2 year yields surpass 10 year yields), which has yet to occur but should it take place might lead to recession in the US. The bears…which seem to follow me in droves and look for every opportunity to tell me that the US economy is about to fall off a cliff (sorry…it’s not).

The following is from Ryan Detrick of LPL. Save this one….send it to all your “inverted yield curve” fear mongers. As can see, while the last 9 recessions started this way, take a look at what first happened; The S&P 500 rises sharply over the next 18 months or so, with an average gain of 30% + AFTER the inversion.


 

Trade Concerns

Trade tensions have gotten most of the blame for the stock market weakness. As we’ve covered here often, China (Shanghai) is down 40% from its highs and 40% of the worlds primary equity markets trade below their 200 day moving average (dma).

So exactly how bad are things, trade/tariff-wise? Consider this fact; today (7/6), after the first round of official US tariffs are put in place ($31billion) it will take total global tariffs to $60 billion, a whopping .03% of all global trade. Three tenths of one percent!

Worst case scenario, should all global governments actually follow through on their tariff threats (0% chance of this)…totaling close to $500 billion in threats…just 4% of all global trade would be threatened. Folks, this looks like the exact definition of “buy the rumor, sell the news”. It’s highly likely…in my view…that global markets have a “rip your face off” type of rally higher.

Technical Analysis

The VRA Investing System is made up of 12 proprietary screens….a combination of the lessons learned from my mentors and my 33 years in the business. 70% fundamentals and 30% technicals. Today, 9/12 screens are in bullish mode, meaning that the odds of a sharp market correction are slim. Very slim.

Back in the Spring of 2007, just 4/12 screens were positive…we know what happened shortly thereafter. But this is not 2007. Consider the following, from @bullmarketsco, one of my new favorite follows. When US equity markets rise each month in Q2 (April, May and June), the markets go on to rise sharply for the next 3–12 months (with a median 6 month return of 10% and 1 year return of 15%). Importantly, the markets have risen 93% of the time, going all the way back to 1954.

 

Now, add this most important research we’ve been discussing here for the last couple of weeks (if you have been following us, we wrote about this two weeks ago here https://medium.com/@kipherriage/statistical-analysis-tells-us-a-nasdaq-boom-predicts-a-broad-market-boom-9a82b9e17623), namely; US markets have moved higher 100% of the time (21 cases) over the last 20 years when a) the nasdaq has outperformed the DJ by 12% over a 4 month period and b) the Russell 2000 has been higher for 8 straight weeks (with median 1 year returns of 15–20%).

Add it all up folks, and if you’re as much a fan of statistical analysis and repeating patterns as I am, the signals could not be more clear; if you’re not long…you are almost certainly very, very wrong.

Until next time, thanks again for reading….have a great weekend.

Kip

Friday
Jun292018

VRA Market and System Update: US Markets Hitting Oversold Levels, China at its Most Oversold Levels in 5 Years, Crazy Investor Sentiment Readings

Good Friday morning all. Just a week ago we began warning about the VRA Investing System’s extreme overbought levels in our market leaders, the Nasdaq and Russell 2000. What followed was an almost immediate overbought sell-off that (as of yesterday) took the Nasdaq back to its 50 day moving average (dma) and to a now heavily oversold level. We see an almost identical picture in the R2K.

As of this morning, most of that overbought selling pressure has evaporated. Doesn’t mean our market leaders cannot go lower, but here’s what it does mean; buying opportunities are here, once again.

In the Dow Jones, the VRA Investing System sees an even bigger opportunity. With yesterdays advance, the DJ is now back above its 200 dma and remains at extreme oversold levels. In the interest of time, we won’t repeat ourselves this morning (too much), but with blow-out Q2 earnings approaching, I remain HIGHLY skeptical of a sharp sell-off from current levels. And here’s an interesting trading note; July is the best performing month of the 3rd quarter. With today being the final day of Q2, look for major fund flows (from rebalancing and retirement/pension accounts) to support the markets until the blackout period on share buybacks is lifted (for co’s that report in the next 1–3 weeks).

Folks, I see almost NO chance that the current trade related fear mongering will match what we saw in Q1. Once again, the financial media has Trump Derangement Syndrome.

This morning we saw blow-out earnings from industry leader KB Homes, which is trading up 8% in pre-market trading. It’s time for the financials and housing stocks to start trading better. Both have pulled back to major support levels and are trading at extreme oversold levels. Buying opportunities, plain and simple.

8/12 VRA System screens remain positive. The biggest concern? The action in global markets, where 40% of all primary equity indexes are now below their 200 dma. Headed into today, each major US equity index is either hitting heavily oversold levels or in the case of the DJ, at extreme oversold levels.

What’s happening here appears clear to me. As Trump reverses decades of unfair trade policy, impacting US GDP annually by as much as 2%, revenue and growth that had been exported to other countries is now returning to the US. Yes, its a form of short term chaos for global markets, but its exactly what Trump ran and won on. Frankly, no one should be surprised.

Bottom line: highly positive for the US economy…short, medium and long term. But also not without its hiccups. Most especially for global markets.

In China, there’s growing talks of financial panic, as evidenced in this leaked news to Bloomberg.

https://www.bloomberg.com/news/articles/2018-06-27/china-think-tank-warns-of-financial-panic-risk-in-leaked-note

Most typically, when it comes to China, articles like this that are “leaked” are the sign of near term panic lows, resulting in higher stock prices in Chinese markets. Take a look at this 5 year chart of FXI:

Current oversold levels in FXI (on RSI and MFI) have only been seen one other time, over the last 5 years. The last time China was this oversold, within 5 trading sessions the bottom was in place and over the next 20 months FXI would soar 100%, doubling in price.

As if right on cue, China (Hong Kong and Mainland shares) were both up big overnight (1.6% and 2%). Only time will tell if the worst is over in China…I expect that it is…which is (90% of the time) the case when investors reach “panic selling” levels of fear. As contrarians, we embrace the fear. we buy when there is blood in the streets. With China’s Shanghai down 40% from its highs, I’d say that qualifies…

For our newer VRA Members, an important reminder; using the VRA Investing System and my 33 years of doing this, day after day, we use leveraged ETF’s and my favorite growth stocks/story stocks to crush Mr. Market. With this approach we’ve outperformed the S&P 500 14/15 years and since 2014 our VRA Portfolio has net gains of more than 2400%.

Not every day is roses…but we must trust the process. Remember, its hard to “buy low” when everyone is bullish.

Finally for this morning, check out what I can only refer to as RIDICULOUS readings from this weeks AAII Investor Sentiment Survey. Bulls sit at just 28.4% (down a huge 10%), with bears surging to 40.8% (up an even bigger 14%).

Folks, this is not how bull markets end. It’s just not. When investors reach this level of fear…in a roaring bull market, no less….as contrarians, we must be buyers. The public is rarely (if ever) on the right side of Mr. Market. Nothing says “short term bottom” more than readings just like this.

Until next time, thanks again for reading…have a great weekend.

Kip

 

Friday
Jun222018

Statistical Analysis Tells Us a Nasdaq Boom Predicts a Broad Market Boom. Trade War, China is Nervous…That is Smart. Sentiment Highly Bullish.

Yesterday we highlighted the fact that the Russell 2000 has reached an overbought level that has occurred just twice in the last 2 years. Right on cue, the R2K sold off sharply, down 1.18%, leading the rest of the market lower (along with its co-leader, the Nasdaq).

But again, I see no serious signs of an impending and larger sell-off here. In fact, new 52 week highs to lows were positive 313–281, something that we simply do not see in a market that is dramatically weakening. Yesterdays 196 point drop in the Dow Jones has taken it back to highly oversold levels, now just 220 points above its 200 dma. Obviously, we want to see this level hold. Here’s why I am highly confident that it will…

The leader, following the 2/9 lows, has indisputably been the Russell 2000. US small cap stocks are (mostly) immune from concerns of a trade war, as 90%+ of their business is done inside US borders.

I point the IWM (small cap ETF) out to you this morning for the following reason; small caps have only been this overbought twice in the last 2 years. What followed, in both cases, was either a pause or a something larger (12% drop following the January highs).

According to the VRA System…and my 33 years of doing this…now is not the time to be adding to positions in this sector. While we do have exposure to this group, our positions are more in the “small cap, story stock” category and should be immune from any pullback in the small caps.

If you’re a fan of statistical analysis (I am), and remain bullish (as I am) you’ll find this interesting (with thanks to BullMarketsCo):

When the Nasdaq is as strong as its been over the last 4 months, outperforming the Dow Jones by more than 12%, the end result is a highly bullish broad market move higher over the course of the next year, with the median 1 year move higher in the S&P 500 of 16.68%. The median move higher in the S&P 500 over the following 6 months is an even more impressive 12.44%.

This supports my research of more than 3 decades, which we’ve covered here often; when the Nasdaq leads the way higher, the broad markets are almost certain to follow. It’s the ultimate “a rising tide lifts all boats” analogy.

Big troubles in China

China, as of yesterdays close, both mainland Chinese stocks and Hong Kong traded Chinese stocks, have hit their most oversold levels in 2.5 years. I continue to expect China to cave on trade with the US/Trump. Because, if they do not, their already 40% collapse in the Shanghai Stock Exchange will turn into something much worse. The Chinese economy is slowing…of this there can be no debate…and with debt/GDP already at 250%+, a prolonged slowdown could result in a form of a death spiral in Chinese debt. Yes, they are most aware of this. And no, I do not expect this to take place. But Trumps not kidding around here…trust me when I tell you that China is increasingly nervous.

The following 3 tweets from this week give you an idea of my thoughts about the potential for a trade war with China. Bottom line; a trade war will only take place if China is suicidal.

Again, when you have debt/GDP of more than 250% (almost equaling Japan), and with a state sponsored semi-capitalist system that is causing serious havoc in the form of rapidly rising corporate defaults, this is NOT the environment from which you want to enter a trading war with your most important import partner (the US, of course).

Trump knows all of this. His team, led by very sharp and hard edged negotiators Wilbur Ross and Peter Navarro, knows all of this. China, were they to repeat the mistakes of 80’s/90’s Japan, would be forced to issue obscene amounts of debt just to survive total economic collapse. History tells us that totalitarian nations do not weather economic collapses all that well (Germany, Russia, Italy, etc).

China has already lost this battle with Trump. The only thing missing is some form of face-saving admission. Look for that in the near future.

Final point; late last night the White House released this 35 page document on trade with China, along with how China has stolen (at minimum) $10 trillion from the US in just the last 20 years. Must read for those that want to understand Trumps views on trade. Take your blood pressure medication before reading it…

https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf

Investor Sentiment

Below is the weekly AAII Investor Sentiment Survey. I’ve used this exact sentiment survey since the late 80’s and today, it’s not even close to indicating that a market top is on the horizon. Not. Even. Close.

Bulls sit at 38.7% (down 6% on the week), with bears at 26.2% and neutral investors still at a very big 35.1%. Remember, at the January highs bulls were 60%. Remarkably (to me), even with the nasdaq and R2K hitting all time highs daily, investors continue to be skittish. As contrarians, this tells us that stock prices have a long, long ways to go before investors are complacent…much less euphoric.

 

Lastly, if you haven’t already signed up to receive our free weekly blog, please do at kipherriage.com. Not only will you receive our weekly blog in your inbox, but you will also receive special offers from the VRA. Just so you know, we have one running right now through next Tuesday, so sign up today at kipherriage.com to learn more!

Until next time, thanks for reading…

Kip