"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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Journal Archive
Twitter: @kherriage

Thursday
Jan102019

December Was a Stock Market Aberration. VRA System Market Internals Flashing Buy Signals. Housing is Solid, Housing Stocks are Cheap.

Good Thursday morning all. Our broad market recovery move higher continued yesterday as FOMC minutes were released that showed Chairman J Powell and Fed Governors explicitly “meant to say” that their December rate hike came with dovish expectations going forward (aka, rate hikes are off the table for a while). But folks, thats not at all how the markets treated Powells comments in December, as air pocket selling and a perfect storm of negativity resulted in the worst December since the onset of the Great Depression.

For those that track seasonal patterns in markets (like us), it also pointed US indexes in the right direction. Asian markets followed our cue from last week with solid 4–5% moves higher.

Not only is January typically a strong month for stocks, known as the “January effect”, where investors buy cheap stocks after tax-loss selling in December, but historical data suggest this month is poised to be even better than normal. That’s because it comes in the third year of the presidential election cycle, which is typically the best for equities.

In pre-election years since 1950, the S&P 500 index has delivered its best returns in January, posting an average gain of 3.9% for the month, according to our friends at the Stock Trader’s Almanac. Part of the reason: Incumbents typically implement new policies ahead of a presidential election in an effort to boost the U.S. economy and make re-election more likely.

One factor that could boost stocks is a thawing in trade tensions between the U.S. and China. Tuesday, Wilbur Ross (Commerce Secretary) was on CNBC and made the point that we’ve made here for more than a year; this is not a trade war…it’s not even about tariffs…this is about China’s rampant IP theft. Ross also stated “these talks WILL result in a resolution into the 3/1 deadline”.

Signs of a strong U.S. labor market and dovish commentary from Federal Reserve Chairman Jerome Powell on Friday helped alleviate some economic concerns and powered our 3% + rally in the DJ on Friday. The FED has been the biggest enemy to investors of late, but this looks to be moderating. Big plus.

Ed Clissold, chief U.S. strategist at Ned Davis Research Group, said he is advising clients to buy industrial stocks and other cyclical sectors such as energy, an area that typically performs well in the latter stages of economic expansions.

“The market doesn’t need a trade resolution to rally, but it certainly would be a big help,” Mr. Clissold said.

And let’s not forget my favorite piece of analytics; since 1946, in the year following mid-term elections, the S&P 500 has been higher 18/18 times with an average gain of 15%.

And this piece of remarkable research from LPL. 24 of the 25 biggest gains for S&P 500 have taken place when SPX is “below” its 200 dma. That’s where we reside today…now the battle is on to recoup the 200 dma for our broad market indexes. As we start trading today, SPX is 6% below its 200 dma.

 

 

Our view continues to be that December was an aberration. Now take a look at our market internals from yesterday. Better than 2–1 readings in both advance/decline and up/down volume.

 

 

Importantly, yesterday marked the first ‘back to back to back” positive readings in the internals since 10/1. This looks to be an important pattern change. We first saw the internals begin to break down in early October…we covered it often here…the readings became brutal and selling pressure followed. Today, we want to see a continuation of another new pattern; “buy the dip”, with the knowledge that this mornings DJ futures are -123 on the backs of weakness in retail. We’ve come a long way in a short period of time…some form of cooling off period and smallish retest should not surprise. But I’ll repeat…the lows are in place…buy the dip is the strategy we will continue to employ.

 

 

A great find by bull markets.co. The percentage of stocks above their 200 dma have risen from below 11% to more than 27%, inside of one month, has occurred just 2 times. In both cases, the S&P 500 was sharply higher over the next 3–6–9 &12 months with 1 year gains of 16% and 39%.

 

 

And check out this chart of Hong Kong (Hang Seng Index). We now have a higher low with a break above the first downtrend line. China’s markets began to display positive relative strength to US markets in October ’19. When China’s markets get hot, they can get white hot, quick.

 

 

Yesterday we saw two home builders (Lennar and KB Home) report disappointing earnings…but that’s not what I was watching…I was watching the reaction in their share prices. Both LEN and KBH finished up more than 8% on the day. Remember, its not the news that matters…its the markets reaction to that news.

XHB (Housing ETF) began to display positive relative strength to the S&P 500 (from 10/19 on) and is up 16% from the 12/24 Christmas eve massacre. Continue to buy housing on weakness. The lows in housing are in place.

 

 

Until next time, thanks again for reading…

Kip

Experience the Vertical Research Advisory free for 2 weeks!! For a limited time we are offering a 2 week free trial to the Vertical Research Advisory, visit vrainsider.com for more details.

Since 2014 the VRA Portfolio has net profits of more than 2300% and we have beaten the S&P 500 in 15/16 years.

For our latest free updates tune in to our daily VRA Investing Podcast atVRAInsider.com or subscribe to our free blog at kipherriage.com

Also, Find us on Twitter and Facebook

Thursday
Jan032019

Happy New Year, Buy The Dip. Apple, Another Important Tell. VRA System Internals Improving. Is China Going the Way of Japa

Good Thursday morning all. Hitting as many quick hitters as possible this morning.

1) One of my investing icons has always been Peter Lynch, of Fidelity Magellan fame and author of one of the best investment books you’ll ever read (One Up on Wall Street). Lynch averaged 28% returns for his Fidelity fund. We’re talking about 2 decades of outperformance. Best fund manager we’ve ever seen.

Lynch believed in building positions in companies that he understood, with great products and visionary management, and then holding those positions until and unless things changed. His quote goes like this “in most cases, we made little to no real money in my positions for the first 1–2–3 years…but then we got the payoff in years 4–5–6, often seeing gains of several hundred percent in a single year. By this time we had built large position sizes so the gains actually mattered to our total performance.”

This was the approach that made sense for Lynch. Its also how I’ve been able to book gains of 500–1000% + over the years in our favorite growth stocks/story stocks. 2019 will be the year that small caps reverse their losses from 2018.

2) Yesterday we wrote the following:

“Important VRA Market Note: today may be an important trading day. Many of the biggest market rallies are initially signified by lower opens (like todays -400 DJ) that then get reversed completely, with the market moving higher for the rest of the day. We have panic-like levels of fear in this market. A wall of worry that should give us short covering fuel for the fire. Combined with large levels of bullish fund flow as we start the new year (pensions, retirement funds, share buybacks and insider buying), its important that we see a solid recovery, marked by improving VRA System Market Internals.

Also, this Friday Fed Chair J Powell will give his first speech since setting off a firestorm of stock selling via his post rate-hike speech of mid-December. Look for big, policy making statements from Powell on Friday. Equity markets “should” rally higher into this.”

— -

The markets responded just as we had hoped, with a nice rally off of -400 in the Dow Jones and an across the board move higher in each broad market index. More importantly, here are the internals. Better than 2–1 positives in advance/decline and up/down volume. Talk about a pattern change from the last 2.5 months. MOST important for the VRA Investing System (which sits at 8/12 Bullish Screens today).

This is exactly what we want to see going forward.

This morning, with Apple (-9% this AM) slashing earnings guidance for the first time in 15 years, we see DJ futures -300 as I write. Today, we’ll get another opportunity to judge this markets “tell”. Once again, I expect our markets to move higher throughout the day. When “bad news” stops knocking the markets lower, there is no more bullish market tell…period.

3) Heres the latest AAII Survey. Sentiment remains at “extreme fear” levels, with just 33% bulls and 42.8% bears.

 

And the CNN Fear and Greed Index sits at 12. Again, extreme fear.

 

 

We are contrarians, most certainly when it comes to extreme sentiment readings on either side.

Buy the dips.

4) CHINA — Another Japan??

I’ve written often about the parallels of China today versus Japan of the 80’s and 90’s. At the time, the world believed that Japan was in the process of overtaking the US (economically and even culturally) with parents teaching their children Japanese and Wharton Business School (among many others) teaching Japanese management practices to a young US audience.

At the time, Japan was buying up US properties left and right, including dramatic overpayments on many (including buying the Pebble Beach Golf Course at 5x its present value).

But then the US got serious about Japan…as did the rest of the world. Japan quickly found themselves overextended and the tide began to turn. What followed was a 75% drop in the Nikkei Dow and a 19 year bear market in Japanese real estate. A brutal lost two decades for Japan.

Trump’s actions with respect to China were never designed to be a “trade war”, but unless China wakes up to the worlds demands that they learn to complete honestly on the worlds economic stage, this mornings news that China’s economy is contracting could soon become an ongoing albatross for China’s economic future. With debt/GDP of 270% today, can China afford to make this kind of colossal mistake?

 

 

I look for China to have a good 2018. I believe they know their history and do not want a repeat of Japan’s two lost decades. China’s markets were the worst performing of all major markets in 2018. This will reverse in 2019.

Until next time, thanks again for reading…

Kip

Experience the Vertical Research Advisory free for 2 weeks!! For a limited time we are offering a 2 week free trial to the Vertical Research Advisory, visit vrainsider.com for more details.

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

For our latest free updates tune in to our daily VRA Investing Podcast atVRAInsider.com or subscribe to our free blog at kipherriage.com

Also, Find us on Twitter and Facebook

Friday
Dec282018

The 1987 Stock Market Comparison to Today. Significant Lows Are in Place.

Good Friday morning all. I’ll repeat…December ’18 will be viewed as an aberration. A perfect storm of stock market negativity…90% of it structural/political…that marked significant long term lows. And we have some hard evidence to back it up.

First, I’ve been referring to this correction/bear market as the 2.5 month version of the 1 day 1987 crash. I lived and worked through the ’87 Black Monday and those that sold their positions on Monday would go on to forever view that as the single biggest mistake of their investment careers.

I watched as seasoned, 20–30–40 year stockbroker veterans, entered “market orders” at mid-day that Monday. Just doing whatever possible to get their clients OUT.

What a mistake. What they had no way of knowing at the time was that the floor of the NYSE was so overwhelmed by sell orders that anything sold at market on Monday would not receive a final fill price (confirmation) until 3 days later…Thursday. I’ve never seen more depressed and absolutely bewildered men, as they learned that their market orders had been filled at the “exact lows” from Mondays 21% crash.

By Thursday, when they got the awful news, the same positions that they sold…blue chip stocks all…had already recovered more than 1/2 of their losses. To make matters worse, by the end of 1987, the Dow Jones would actually close 2% higher on the year. Life-long careers were ended that week. Our firm was a morgue, for many months to come. Selling into a vacuum…like ’87 and like 12/18…is/was a mistake.

Take a look at the following, from Troy Bombardier. Like ’87, the S&P 500 just fell more than 1.5% for 4 consecutive days…it then rose more than 5.8% over the next 2 days. From 1927 on, this has occurred just 2 times. 1987 and 12/18. And like ’87, multi-year lows are likely in place, today.

This is the same chart that we’ve focused on since the Christmas eve capitulation, when the S&P 1500 reached its most oversold levels in the history of the S&P 1500 (1500 largest co’s in the US). As we wrote at the time, this is exactly what capitulation looks like…42% of all S&P 1500 stocks hit a 52 week low, this Christmas eve. But its what happened next that we want to key on; following the 2011 lows (37% at new 52 week lows), the S&P 500 began a move that would take it 105% higher. Then, following the 2016 lows (34% at new 52 week lows), the S&P 500 began a move that would take it 55% higher.

Importantly, yesterdays trading gave us exactly what we wanted to see. A big, near 900 point move higher in the DJ (from -630 to +260), and it took place with new 52 week lows putting up MUCH better readings of just -3% on the day. This was and is my most important market internal. It looks very much to have marked the lows.

Now, take a look at the S&P 500 percentage of stocks below their 200 dma. On Christmas eve, we hit the 3rd lowest reading on record, with just 12% of S&P 500 trading above its 200 dma. History tells us that the previous 3 low readings also marked important capitulation in the stock market.

By no means are we out of the woods. Should we retest and break the Christmas eve lows, then we have real trouble on our hands. I see the probability of this now as “extremely low”.

The smart play is to continue to use dips. Buying the dip is the only move that makes smart money sense, based on my 33 years of doing this and the historical data that tells us this goose was way too overcooked.

Like 1987, once the lows were in place, the gains that followed were superb. That’s our stock market, today.

Podcast

Lastly, we recorded an important podcast yesterday, where we got into the following topics

1) December will be remembered as an aberration. A mistake, fed by hedge fund forced liquidations, computer driven sell programs, a hostile Federal Reserve and an air pocket of selling. The Dow now has a 24,300 magnet tied to it (minimum target). 50% retrace. Buy the dips.

2) Dramatic reversal higher yesterdat…from a technical point of view it confirmed Wednesday’s reversal and 1080 point move higher (big). Again, buy the dips.

3) The internals did just what we were looking for yesterday. New 52 week lows, in particular.

4) Best looking sectors for the deep value investor; housing, financials and emerging markets/China. Each is trading at “recessionary levels”.

5) and finally, should we ever see the Fear & Greed Index hit 2 again, sell all of our worldly possessions and buy index call options.

8/12 VRA System Screens remain bullish.

https://soundcloud.com/user-640389393/vra-podcast-kip-and-tyler-herriage-daily-investing-podcast-dec-27-2018

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

Kip

Experience the Vertical Research Advisory free for 2 weeks!! For a limited time we are offering a 2 week free trial to the Vertical Research Advisory, visit vrainsider.com for more details.

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

For our latest free updates tune in to our daily VRA Investing Podcast atVRAInsider.com or subscribe to our free blog at kipherriage.com

Also, Find us on Twitter and Facebook

Thursday
Dec202018

VRA Update: Fed Rate Hike. J Powell Owns a Dubious Record. Fear and Panic. Blood in the Streets.

Good Thursday morning all. As expected, J Powell’s Fed hiked rates to 2.5% yesterday. The DJ had hit an intraday high of +330 just moments earlier…then Powell started talking…. -500 DJ within 30 minutes, before closing -351.

Powell said two things that sent the markets lower (850 point swing in the DJ):

1) Going forward, he pegged US GDP at 2% to 2.5% (‘19). It sounded very much as if that is his preferred target…not the 3% to 4% to 5% that Trump is targeting.

Who needs more and better paying jobs? Who needs wage increases? Powell sounded very much like an ivory tower policy wonk that is out of touch with the reality of everyday Americans.

2) Powell made it clear that the Fed’s $50 billion/month runoff of Fed holdings will continue, apparently regardless of how the economy reacts.

J Powell now has the unique distinction of having the equity markets sell off every time he gives an FOMC speech. Stocks have a well established pattern of moving higher during FOMC Fed Chair speeches…but Powell has sent the markets lower, each time.

Having said this, Powell got a lot right too. The US economy IS strong. The Fed does need to continue to reduce its balance sheet, which reached $4.5 trillion under Obama. And Powell’s Fed did reduce expected rate hikes in 2019 to two, from three, while also mentioning that even those hikes would be data dependent.

What’s the Wall Street/social media whisper conspiracy theory (it’s actually much more than a whisper)? This tweet sums it up pretty well. The deep state Fed, hard at work. Fear of the unknown takes over.

VRA Market, System Update

The VRA Investing System sits at 8/12 Screens bullish. We stand by our call yesterday that a sharp move higher is coming. Late last night we got the latest from the Fear and Greed Index…a reading of 4. This is the lowest reading in history. All time lows.

Combined with this weeks AAII Sentiment Survey readings (24.9% bulls and 47.3% bears), one thing we know for certain; investors are in full on panic mode. Blood in the streets, a fact that was confirmed last week by all time record weekly fund outflows of $46 billion.

As you’ve seen us discuss this week, at minimum we are due for a counter move higher. A significant one. Thats exactly how I see this year wrapping up. The VRA Market Internals from this move higher will determine what happens next.

Also, consider that the Russell 2000 is already down 25%. The S&P 500 is down 16%. Bear markets are defined by 20% moves lower….we’re there folks…assuming it stops at 20%. Again, I see us as being there, today.

And this; assuming we were to actually have a recession, according to Barrons banks stocks (on average) fall 31% (peak to trough) during a recession. As of yesterday, large cap banks/brokers are down 32%. Again, we’re there.

And this tweet from Dave Bergstrom (another good follow) is most interesting. SPX futures closed at the bottom 30% of their daily range for the 5th straight day. This has happened just 3 other times. As you can see, following each of these, the markets have roared higher. Another solid example of “extreme fear”.

And this from Bullmarkets.co. Yesterday the VIX actually fell, while the S&P 500 dropped 1.5%. Historically, this is a harbinger of sharp falls for the VIX (which is a major market positive), with the “average” decline in the VIX over the next year of 44%.

And my tweet from last night. Below is the chart of gold from 2006–2008, just as the housing crisis was kicking off and financial panic was nearing. Gold did its job as a predictor of systemic issues to come, rising from $500/oz to $1000/oz, a 100% move higher. But today, gold has risen just 8% since August. Does not mean that it won’t spike higher from here, just that as of today, gold is not predicting a systemic issue is on the horizon.

As a reminder from yesterdays update, all 4 broad market US indexes are now at “extreme oversold” levels. Again, time after time, we see panic occurring in sentiment and technicals. While at the same time, the US economy continues to expand, rather than decline.

And here’s a positive to keep in mind. To date, for ’18, a record $800 billion in share buybacks has already occurred. But from corporate commitments, we know that another $300 billion remains left to be bought back, which will take the record number of buybacks to $1.1 trillion this year.

I believe we are on the cusp of a 50% retracement from the current move lower. This would take the DJ back to roughly 25,000 (closed at 23.323 yesterday).

In our next update we’ll get into VRA growth stocks…they are primed for great things in ‘19.

Until next time, thanks again for reading…

Kip

Experience the Vertical Research Advisory free for 2 weeks!! For a limited time we are offering a 2 week free trial to the Vertical Research Advisory, visit vrainsider.com for more details.

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

For our latest free updates tune in to our daily VRA Investing Podcast atVRAInsider.com or subscribe to our free blog at kipherriage.com

Also, Find us on Twitter and Facebook

Thursday
Dec132018

VRA Update: VRA System Market Internals, Pattern Change. China Outperformance Continues. Investors in Extreme Fear.

Good Thursday morning all. While US markets gave up more than half of their gains yesterday, with the DJ closing +157 (from 450 pt highs), we did see a pattern change. Maybe an important one.

Check out the internals from yesterday. Better than 2–1 advance/decline and a big 3–1 up/down volume. For our markets to find solid footing and have an opportunity to regain their 200 dma, its important that we have multiple days of positive readings, at least somewhat as good as these.

 

 

Bottoms are messy but the internals continue to improve (by just a bit). Our pattern of higher lows for the years is still intact but some work to do to get back over 200 dma.

Which is my one primary concern about this market. The longer we remain below the 200 dma in our broad market indexes, the more emboldened short sellers will become. Watching closely.

Emerging Markets

We’ve also said consistently that the US-China trade war is not actually a trade war. It’s always been about China opening their markets, legitimately, to the entire world. Long term, both the Chinese people and the entire world will thank Trump. One man…with guts apparently made of steel…all American, through and through. Thank you Mr President.

 

 

Asian and emerging markets continue to recover. We saw solid, 1% + gains across the board earlier this week. Below is the updated chart we’ve been focusing on; FXI (China ETF) vs SPY (S&P 500). The outperformance of FXI since mid-October is striking. BTW, FXI is now just 5% below its 200 dma.

 

 

Investor Sentiment

An important component of the VRA Investing System is sentiment, and man is it ever bearish today. This post from the fat pitch blog makes the point well. Market timers are as bearish right now as at any point in history.

 

 

Our tried and true sentiment indicators hit deep into “fear” mode…another sign that the sell-off was coming to a close. The lowest reading I can remember seeing (ever) was 5. But todays reading of 9 tells us that theres “blood in the streets”. We know what that means…

 

 

If you’ve been here for a while, you know that we warn you when the markets are hitting extreme overbought/oversold and when investor sentiment reaches exuberance/fear. We took a combined 135% in net profits in the first quarter of this year for just that reason (AAII hit 60 and our momentum oscillators hit extreme overbought). We are contrarians. When everyone is going right, we want to go left. Lemmings, we are not.

If you’re bearish, you’re in the big majority. We do not want to be part of this majority.

 

 

Below is a 2 year chart of the DJ, but its this years trading we want to look at today. For ’18 we’ve been stuck in one big trading range, from 23,500 to 26,500. Like a ping pong ball, we’ve bounced back and forth all year.

Lets take a closer look…I continue to believe the technical positives outweigh the negatives.

1) Sell side volume pressures have declined.

2) Both RSI and MFI have continued to improve, even as the market declined.

3) While stochastics never reached heavily/extreme oversold on this last decline, I’m good with that. The Santa Claus rally was due to kick in…I believe the move higher extends.

 

 

As we’ve been discussing here, over the last 3 weeks (even as the markets have taken a hit) relative strength in important areas began to improve. One chart we focused on last week was the semiconductors. With the DJ down earlier in the week, the semis went green. What led the way down is now leading the way higher. We want to see tech lead the way out of this correction.

 

 

Speaking of relative strength, gold has been trading exceptionally well and is now approaching its 200 dma for the first time since June. Short term, its reaching overbought levels, but with the FED about to cease rate hikes and the US dollar topping and reversing, this bodes very well for gold and the miners.

 

 

At the heart of the global bull market to come will be the worlds transformation from globalism to populism. Its occurring everywhere we look…massive long term positive. And we’re getting good news again on the US-China trade war (it’s not), as China continues to bend to the will of one man…DJT.

 

 

Until next time, thanks again for reading…

Kip

Experience the Vertical Research Advisory free for 2 weeks!! For a limited time we are offering a 2 week free trial to the Vertical Research Advisory, visit vrainsider.com for more details.

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

For our latest free updates tune in to our daily VRA Investing Podcast at VRAInsider.com or subscribe to our free blog at kipherriage.com

Also, Find us on Twitter and Facebook