"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

Thursday
Nov152018

VRA Update: Q3 Earnings, Best in 8 Years. Bull Market Lives On. Oil and Nat Gas. Death Cross in R2K. Investor Sentiment Readings — Extreme Fear.

Good Thursday morning all.

Some quick hitters to start the day.

Third quarter earnings have absolutely killed it….regardless of how the markets have responded to the results. Yes, we want to watch the “reaction” to the news rather than the news itself, but until we see a semblance of proof that the US economy is decelerating, we must continue to be bullish on both the US economy and equities. Here are the bottom line numbers for Q3 S&P 500 earnings to date:

- S&P 500 EPS +27.9% (vs Q3 ‘17). This is the single best quarter since 2010.

-S&P 500 Q3 earnings are beating expectations by a huge 6.2%

-S&P 500 Q3 revenues are up 8.5%, handily beating estimates (6.5%)

VRA Bottom line: We see NO signs of a slowing economy. Instead, the FED’s 8 straight rate hikes have resulted in a sharp move higher in the US dollar, which in turn has caused headwinds for global equity/currency markets and a slow down in US housing, along with a correction in equity markets, but we continue to view this as a “reset”. A reset that will be followed by the next move to all time highs in US stock markets and a major recovery move higher in global stock markets.

OIL/Nat Gas

Oil has been hit hard…its the most oversold since the late 2015, early 2016 lows. By some metrics, oil is now MORE oversold than when it bottomed below $30/barrel.

What happens when oil reaches this level of oversold, historically? High odds of a sharp move higher, with median 1 year gains of 15.51% over the next year (with 77% probability). HT to Bullmarkets.co

 

However, know that nat gas has been on fire. The chart below is the very definition of a parabolic move higher. From its Feb lows, nat gas is up a big 64%, a move that has caught traders short gas, while long oil. The move lower in oil is purely technical in nature, produced by traders unwinding their record long positions and then shifting those funds into nat gas.

 

 

Death Cross, Russell 2000

As we’ve discussed this week (and on our daily podcasts, which can be accessed at vrainsider.com), the R2K has now experienced a “death cross”, where the 50 dma crosses over the 200 dma. The inverse is called a “golden cross”. Death crosses have a very real place in technical analysis, but its also helpful to study the analytics of past death crosses. Take a look at the breakdown of all death crosses in the R2K, going back to 1980.

Here’s what we see. Yes, in the very short term (1–2 weeks), a death cross is (slightly) negative. But take a look at what followed 1 full year later. Average gains of 14%. Not exactly befitting of the name.

 

 

Sentiment

Fear is (once again) running rampant in US equity markets. Take a look at the most recent investor sentiment readings (both updated last night):

CNN/Money Fear and Greed Index @ 7 (extreme fear). Any time this reading gets below 10, we are “very” close to an important market low and reversal higher. VRA Market System readings tell us that weakness may persist this week (momentum oscillators are currently in no mans land), but as we head into next week (Thanksgiving) the year end Christmas rally will begin to kick in.

 

 

Here’s the weekly AAII Investor Sentiment Survey: 35% Bulls, 36% Bears, 29% Neutral. While the AAII readings have yet to reach extreme fear, here too we see excessive bearishness.

 

 

Trade War

Earlier this week the WSJ reported that US/China trade talks have resumed, at the highest levels. Treasury Secretary Mnuchin is now directly involved. While this has never come close to an actual trade war, the global reset from Trumps trade policy has made its impact felt. We continue to expect a deal prior to year end…very hopefully at the G20 summit at the end of this month.

 

 

Bottom line: our views really have not changed. While we cannot rule out a retest of the 10/29 lows, we remain positive on US and global markets.

Until next time, thanks again for reading…

Kip

For our latest updates tune in to our daily VRA Investing Podcast atVRAInsider.com

Since 2014 the VRA Portfolio has net profits of more than 2300% and we have beaten the S&P 500 in 14/15 years.

Also, Find us on Twitter and Facebook

Friday
Nov092018

VRA Update: FED Minutes, Nervous Nellies. Strong Dollar is the Real Story. More Proof that Markets Love a Divided Congress. Oil Hitting Extreme Oversold.

Good Friday morning all. Yesterdays FED minutes spooked the markets…just a bit…as they confirmed their hawkish interest rate policy into year end of into ’19. Here’s the bottom line; the FED will hike again in December. Thats a certainty, making it 9 straight rate hikes.

A quick look at this chart of the US dollar tells us most everything we need to know, as it pertains to the strong dollar and action in emerging markets and commodities. A strong dollar puts significant pressure on emerging market currencies and dollar based commodities, which explains much of the weakness these markets have seen in the past year.

More Proof that Markets Love a Divided Congress.

As we’ve been discussing, the markets actually like a divided congress, as evidenced by the 2% moves higher across the board Wednesday, featuring a huge 545 point move higher in the Dow Jones and an even larger 194 point move higher in Nasdaq (2.6%).

Our work in technical analysis (specifically volume analysis and VRA System Internals), combined with ongoing US economic fundamentals told us that the lows were in place, from 10/29 on.

Wednesday’s move confirms for us that the train is (once again) leaving the station. Could we have another retest of the 10/29 lows? Sure…anything is possible…but at this point it looks very much to me like we will not have a retest. Analytics and seasonality tells us that it is highly likely that future pullbacks will be light.

VRA Bottom Line: US and global equity markets are almost perfectly positioned for a 10–20% move higher, from now til end of Q1. This is how we’ve been playing it…nothing has changed.

INVESTOR SENTIMENT HIGHLY BULLISH

Here at the VRA we truly love being a contrarian. When everyone is bearish, we tend to be bullish. When everyone is bullish, we become cautious. But today, sentiment tells us that investors are far too negative. This negativity is fuel for the move higher in stocks.

Urban Camel is another of our favorite follows on Twitter. Below we see that market timers are as bearish today as they were at the 2/16 lows. This is also exactly when the VRA became ultra bullish. Today, wrong-way market timers tell us that, once again, they’ve likely got it wrong.

Oil Hitting Extreme Oversold.

The commodity chart I’m most interested in today is that of oil. Below is a 3 year chart. The vertical blue lines indicate each instance that oil has reached “extreme oversold” levels…which is exactly where oil sits today. In fact, as of this morning, oil is now as oversold on our key technical/momentum oscillators has it has been since the Jan/Feb 2016 lows, when oil was hitting cycle lows of $26/barrels. The VRA used these exact signals to go long oil/energy stocks once oil traded back up and through $32.

Note: over the last couple of months we have been in deep due diligence on a potential new buy rec in the oil patch. The timing of our new buy rec (which will come in the next week or so) looks to coincide with a significant buying opportunity in the underlying commodity as well. Stay frosty.

While no one can predict short term moves with precision (only charlatans claim to), US equity markets are poised for major gains over the rest of ’18 and into ’19. Markets love climbing the wall of worry.

Next up; as global trade tensions get resolved, emerging markets/Europe will start playing catch-up to US equity markets, further fueling higher stock prices. This is the minority view today…it also happens to be the correct view.

One caveat; while the VRA System sits at 10/12 screens bullish, we still must see continued improvement from the internals and each major US index trade back above their 200 dma, right now only the Russell 2000 is the only one still below it 200 dma. I look for this to happen in the coming days.

Until next time, thanks again for reading…

Kip

For our latest updates tune in to our daily VRA Investing Podcast atVRAInsider.com

Since 2014 the VRA Portfolio has net profits of more than 2300% and we have beaten the S&P 500 in 14/15 years.

Also, Find us on Twitter and Facebook

Friday
Nov022018

VRA Update: The Lows Are in Place. 3 Points of Importance. Mid Term Election Pattern Says we MUST Own Stocks Now.

Good Friday morning all,

The markets lows are in place, for all of the reasons we’ve been covering here. The combination of incredibly strong US economic conditions, surging corporate earnings and seasonality investment factors tell us that we must be in this market.

3 points of importance:

1) We must get back above the 200 dma in each of our major indexes, the DOW is there now. Another good day of gains like we saw this week would take care of this for all indexes except the Russell 2000, which has a bit further to go.

2) Market internals must continue to improve. Yesterday featured 3–1 positives in advance/decline and even better in numbers in up/down volume. Solid. But new highs to lows came in at 92 new highs to 285 new lows…this is the lone indicator that continues to trouble us most. Again, these readings are improving, but until we see marked improvement in this single indicator, we cannot discount a retest of the lows.

3) Get past the midterms. 2 trading days left after today. It’s my belief that the market enjoys a divided DC. We remember well how US markets soared under both Clinton and Obama…both presidents had divided governments.

Regardless, getting past 11/6 will remove the current volatility. You know my views…expect a strong move higher into year end/Q1 ‘19.

As we’ve covered, every midterm election year since 1946 has seen stocks soar over the next 12 months. Here, we also see that every midterm year since 1946 the S&P 500 has been higher from the October lows to the end of the year. 18 for 18 with an average gain of 10.6%. Repeating patterns like this are hard to find. Almost impossible to find. Repeating patterns tend to be an investors best friend.

Employment

Minutes ago we learned that US employers added 250,000 jobs in September, blowing away estimates, with wages rising 3.1%, best in a decade. Unemployment rate of 3.7%, best in something like 50 years.

I’m a broken record on this but lets review some basics, one more time:

Trump was elected, to a large degree, because he is a businessman (and because HRC was an awful candidate with an intern loving dirtbag for a husband). Tax reform + regulation destruction + new trade deals = animal spirits unleashed. It’s that simple.

Next up; US GDP is headed to 4% growth for the full year (2019), with the very real likelihood that US GDP will break 5% by the end of Trumps first term.

Trump has crushed China. They’ve already lost…they know it. Now they can go the way of Japan from the 80’s/90’s or choose to implode.

Our view has not changed. The Dow Jones will break 40,000 by the end of 2020. The DJ will break 30,000 in “early” Q1 ’19. Pullbacks must continue to be bought.

The theme for 2019, as global equity markets rock and roll:

1) Nationalism beats globalism. The events in Hungary, Poland, Brazil, plus of course Brexit and Trump mark the beginnings of a massively important worldwide pattern change. HIGHLY bullish for stock prices. Even more bullish for human beings.

2) Global reflation trade. Oil, most commodities and metals and emerging market economies will soar over the next 2–3 years. But the real action will be in stocks, as the public falls back in love.

While real damage was done in October, not to worry, strong US fundamentals should now take over. The forward P/E on the S&P 500 now sits at 14.6. Far too low, IMO, with what will be another year (’19) of 13–15% earnings gains. I predicted 15% for ’18 and today we’re at 26%. Dollars to donuts I’ll be on the low side in ’19 as well.

Until next time, thanks again for reading…

Kip

For our latest updates tune in to our daily VRA Investing Podcast atVRAInsider.com

Since 2014 the VRA Portfolio has net profits of more than 2300% and we have beaten the S&P 500 in 14/15 years.

Also, Find us on Twitter and Facebook

Thursday
Oct252018

VRA Update: Fear of the Unknown, Here We Come Again. VRA System Update. Sentiment at Extreme Fear with Volume Dropping. Hallmarks of a Bottom.

Good Thursday morning all. Once the break through DJ 24,768 occurred, SkyNet like AI technical selling pressure kicked in. Know this; the selling pressure from the final 30 minutes was purely algo related. This is a structural problem in the markets thats been with us for some time…90% of all trades are now ETF related…few investors today buy individual stocks, making mini-flash crashes possible.

This morning we’re seeing a bounceback of some 200 points. I’ve never been a big fan of buying higher opens. Wisdom from my mentors. However, I did notice a big positive when running VRA System screens this morning. Yesterdays sell-off occurred on 40% lower volumes than the 10/11 sell off in the DJ of 843 points. Reductions in sell side volume are common hallmarks of exhaustion to the downside.

Here’s another hallmark of a near term bottom. Check out both of the sentiment surveys we use at the VRA. AAII and CNN/Money. Both readings are at “extreme fear” levels.

 

Here’s the updated S&P 1500 new highs to lows. Again, until this reverses, the market lows will not be in place. Most typically we see this indicator bottom 1–3 days before a final low in the market.

 

 

And here’s another popular method of watching extremes in the internals. The Mcclellan Summation Index. As the horizontal lines indicate here as well, its a 1–3 day leading indicator of market bottoms.

 

 

As of yesterdays close, just 34% of all stocks are above their 200 dma. Just 13% are above their 50 dma. So if the market decline is not tied to economic slowdown/recession, why is it dropping?

Fear of the unknown

We still see NO signs of an impending economic slowdown in the US. Well, we are seeing housing stock prices tank (while actual housing remains strong) and financials are trading awfully. Are these signs of an impending economic slowdown? I don’t think so…here’s why; until the LEI (Leading Economic Indicators) begin to break down, there is NO reason to expect a recession. Until consumer confidence, freight/shipping and employment reverse lower, there is NO reason to expect a recession.

The fear of the unknown. For example….

 

 

Yes, in the 5 months leading up to 9/11, the Dow jones had already fallen by 11%.

Today, with pipe bombs and white powder, the fear is that something “major” could be next. That would not surprise me…but no…its not what I expect (meaning nothing major…like 9/11).

Instead, I see this as an overreaction by nervous markets. Here’s some evidence of that; if actual bad news was on the way, gold would be on fire. Today, gold is just slightly higher. Also, the VIX (fear index) is reading at 23.50 today. Elevated, sure…but a 30–40 VIX is the sign of real turmoil. Does not mean we won’t get there…but nowhere near it today.

At the same time, both the TRIN (short term trading index) and put/call ratio remain HIGHLY elevated for the 6th straight day. These work like rubber bands for the market…they stretch just so far and then they snap back….that snapback sends stock prices sharply higher. We’re reaching those levels now.

I DO NOT LIKE the fact that we’re under the 200 dma on each US indexes, and as covered earlier, I DO NOT like the fact that our internals are not improving.

The fear of the unknown almost always leads to great buying opps. I look for that to be the case here as well. We’re in the most seasonally bullish time of the year. MidOctober-May are THE time to be in the market (90%+ all gains occur). And the midterm election year pattern. 18/18 winning years, from 1946 on, with an average gain of 15%.

We may just have to get past the mid-terms first. If some group of idiots set off a bomb…or worse…we’re headed lower. Otherwise, this is very close to THE time to buy.

Until next time, thanks again for reading…

Kip

For our latest updates tune in to our daily VRA Investing Podcast at VRAInsider.com

Since 2014 the VRA Portfolio has net profits of more than 2300% and we have beaten the S&P 500 in 14/15 years.

Also, Find us on Twitter and Facebook

Friday
Oct122018

VRA Update: Signs of Capitulation Everywhere We Look. My Short Term Prediction

Good Friday morning all. Hitting the most important bases this morning…clear signs that the velocity of the sell-off of the last 2 days (Dow Jones 1300 point loss) was algo driven with capitulation everywhere we look.

This is not a crash. If it were, gold would be catching a serious bid, debt markets would be showing signs of panic and circuit breakers would be going off. Instead, this is “elevator up, escalator down” market action that I’ve seen play out more times than I can count.

Here are the “clear” capitulation signs that that tell us an important low is likely in place.

Yesterday:

  • VIX hit 29 (volatility index)
  • TRIN closed at 1.48
  • Put/call ratio closed at 1.21
  • Each major US equity index has pulled back to exactly (or just below) their 200 dma, with each hitting “extreme oversold” levels on VRA System

As of yesterdays close, the S&P 500 is now 3.8 standard deviations below its 50 dma. This has happened just 8 times since 1963…check out what happened next.

CNN/Money Fear and Greed Index is now at 5. This is the lowest reading in 3 years. Folks, we didnt even see a reading of 5 in February of this year or at the 19.9% S&P 500 brutal sell-off lows from 2016. As contrarians, there may not be a stronger buy signal.

This morning the Dow currently up 300 points higher. I’ll be closely watching the internals today…this is also the worst stretch of negative VRA System Market Internals since the February lows. That was THE time to buy.

With earnings reports resuming, so will share buybacks. That’s $80 billion/month in buying pressure.

It’s hard to buy low when everyone is bullish. We can only buy low when investors are panicky. When there is blood in the streets. The bottoming process is just that…a process that can take time to play itself out. So, while I do not recommend chasing this higher open, every VRA Portfolio buy rec remains a buy rec.

Big picture points to remember:

1) October is typically a wild month. It gives us our best buying opps. Mid-October to May are our most bullish months.

2) Midterm election buy signal. Since 1946, the markets have been higher 18/18 times with an average gain of 15%.

3) the FED has raised rates too quickly. Fed Chair Powell signaled “numerous” hikes were on the way back on 10/3, which kicked off the current sell-off. The bond market is rallying this morning…it will soon take stocks with it.

The Russell 2000 is now hitting Extreme Oversold across the board. These levels do not last long. Right behind the R2K is Nasdaq (heavily/extreme oversold) with the Dow and S&P 500 likely reaching these levels today.

Now take a look at XHB (homebuilder ETF). While still up 16% from election level lows, XHB is now down 25% from its January ’18 highs.

It’s now reached the worst levels of extreme oversold since the ’08 crisis (MACD, RSI, MFI and stochastics). Blood in the streets.

Bottom line: XHB has not been this oversold in a decade. This sell-off in the homebuilders is hugely overdone. I see a sharp recovery move higher in housing stocks, along with the broad market, into year end.

Here are some short term predictions from me:

1) Trump will succeed in getting the FED to put the breaks on rate hikes. We’ve now had 8 straight hikes and unless we want a repeat of 2007–2008 (the FED hiked 17 straight times from 04–06, which helped create the GFC), rate hikes must slow.

2) The ST spike in rates will soon end. I have no problem with a 3.25% 10 year yield…neither does the market…but its the velocity of the move that has had the markets attention.

3) Emerging markets have been crushed. We’ve crushed China with it. I continue to predict that China and the US will enter at minimum a basic agreement on trade, prior to year end.

4) Unless gold catches a serious bid, we are “very” close to the end of this reset. I see no systemic issues. An important low is near.

Until next time, thanks again for reading…

Kip