"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

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

Thursday
Jun142018

Crushing Mr. Market in a Rising Interest Rate Environment: What rising rates mean for your Portfolio

As expected, the FED raised rates…we now have a 2% fed funds rate for the first time in a decade…they also signaled there may be 2 additional rate increases this year.

The central bank’s updated “dot-plot”, a chart of the projections for interest rates of Fed members, should offer a clearer outline for how many rate hikes will be on the way. More than anything, the Feds dot plot (and press conference comments) are what the markets will be listening to as it holds significance for how Trumps fed views the Feds role in managing the US economy. Higher rates and a stronger dollar can contribute to how investors value stocks and other assets, but as we’ve covered here often, the facts are clear; stocks love higher rates…to a degree that is…as higher rates confirm an economy that is expanding, and earnings that will continue to grow.

And remember, the fed funds rate was also at 2% as Lehman Brothers announced bankruptcy, back in the dark days of September 2008, as the financial crisis kicked into high gear. The point being, until the fed funds rate surpasses 3%…possibly even 3.5 to 4%…our stock markets will almost certainly continue to rise.

Yes, my view is the contrarian view…but it also has the advantage of being supported by historical investing patterns and returns. We’ll continue to ignore the chicken littles that tell us…seemingly daily…that higher rates will soon lead to the next market crash. We’ll use their bearish positioning/short selling to keep the markets climbing their wall of worry. Much needed fuel for the bull market to keep charging higher.

Unlike most followers of monetary policy, I like to think I have the ability to think using at least a bit of logic. And logic tells me that rate hikes are a very, very good thing, for all of the reasons we’ve covered in these pages since the first Fed rate hike, back in December, 2015. Rate hikes signal everything thats good about an economy…it also allows savers the ability to make a somewhat decent return on their most conservative of money. How novel a concept…retirees may no longer be required to take uncomfortable levels of risk, throwing money into the stock market. At just 2% yields, we’re not there quite yet…but by this time in the next 12–18 months, when the fed funds rate is approaching 3%, savings accounts might start to mean something, again.

J. Powell…keep up the great work.

Again, this will mark the 7th hike since December, 2015. Lets take a look and see what gold, silver and GDX (miner ETF) have thought about rising rates, over the past 2.5 years.

Gold bottomed with exactly the first fed rate hike, 12/16, and is up 23%. Still needs to break $1375-$1400/oz before a confirmed breakout, but everything about this chart tells us that pressure for a big move higher is building. Massive volume expansion…smart money global players (including central banks) buying up all they can (even as the price is manipulated over the short term to fool investors to the spike to come).


 Silver is up 24% from the first fed rate hike…eerily matching golds move almost completely. The action in silver is even more compelling to me than gold. When multi-year coiled springs like the one in silver break out, the moves can be bitcoin like.


 

But the big winner…as we would expect…comes from GDX (miner ETF), which is up a big 80% from the first rate hike lows. A nearly 4–1 move advantage over gold/silver. When this big triangle breaks higher we’ll have to wait and see but once volume starts to build (it has gone dormant of late) we’ll have our first real clues.

Bottom line; precious metals/miners love a rising rate environment…most certainly the early innings. Our proof of this is the fact that the biggest bull markets have occurred in exactly this environment

 

ECB Ceasing QE

We also learned this morning that the ECB will be ceasing QE at the end of this year. Again, more great news, although you wouldn’t know it from the many growling bears this morning, who continue to look for reasons…that simply do not exist, according to the VRA Investing System, to predict the coming recession and global stock market crash.

Sanity is finally returning to monetary policy. Combined, from the beginning of QE from the FED and ECB, more than $6.5 trillion in central bank funny money has been printed. Those funds were then used to directly purchase government debt in the US and Europe (among others, including corporate bonds in Europe). Frankly, its a miracle the worlds financial system did not collapse under the weight of it all. Today, the VRA Investing System could hardly be more bullish.

Quick Hitters

1.) This morning, retail sales figures for May came in at +.08%, more than double the estimates. More great news for a very quickly growing US economy. Remember, the Atlanta Fed estimate for Q2 GDP sits at 4.8%. Anything over 4% is a huge win. I continue to look for full year GDP this year of better than 3%, with 4% or better in 2019 (and wait til Trump passes Tax Reform phase 2….this is the phase where our personal rates begin to drop).

2.) Wednesday’s 119 point loss in the Dow Jones (half that % in other indexes), ended the 7/7 run of hugely positive market internals. Still, new highs to new lows were positive nearly 4–1, more confirmation that the broad markets are headed higher.

3.)After an historic meeting with North Korean President Kim Jong Un, President Trump has done but what no American president has done before him, getting NK to agree to complete denuclearization. Long ways to go here, but folks, if you’re betting against #45, I have a question for you:

Why? Trumps pattern of winning, on every level, is crystal clear. The man simply does not lose. Stunning successes, time and again. I covered some of his most important wins in an am tweet.

 

4.) We also learned this morning that US small business optimism is at its second highest readings of all time. The very definition of animal spirits. Yet the Dow Jones remains some 1300 points below its all time high. This spells opportunity.


 

Finally, if you’re not listening to our end of day podcasts, please join us! Tyler and I tell you…in roughly 5 minutes…what happened in the markets with specifics on VRA Investing System readings. Sign up at vrainsider.com/podcast

Join us as the VRA continues to crush the market, with 2400% in net gains since 2014, beating the S&P 500 14/15 years since inception in 2003!

Until next time, thanks again for reading…

Kip

Thursday
Jun072018

VRA Update: Nailed it. Steroid-like Move Higher, Melt-up. VRA Market/Portfolio Review. 68% Average Gain on All VRA Buy Recommendations.

Good Thursday morning all. Another big green day in US and global stock markets as bears capitulate, by covering their shorts, and then add to the already surging buyside volumes by then going long themselves. This is the nature of how a big move higher in the stock market occurs…this one looks to be just getting started.

VRA Market/Portfolio Update

Another big move higher in the markets yesterday. If you’ve been able to join us on our end of day podcasts (sign up at vrainsider.com/podcast), you heard the following: yesterdays new highs to lows hit 859–172. Stunning broadening action. It also marked back to back to back days of 5–1+ readings.

Last time we saw this? Early January…just prior to a 1300 point move higher in the Dow Jones.

But…VRA System readings are getting stretched. Take a look:

Nasdaq: 97% overbought. Extreme readings…however, MFI and RSI still have a ways to go (avg of 73%).

Russell 2000: 96% overbought. Extreme as well…however, MFI and RSI have a ways to go (avg of 72%).

S&P 500: 92%. Extreme as well…however, MFI and RSI at just 50% avg.

Dow Jones: 69% overbought. Room to run. MFI and RSI 46%. The DJ…the most trade-centric of indexes…is in fine shape, which helps to explain why it is now leading the way…playing catch-up.

Bottom line: while I fully expect the move higher to continue, this is almost always when investors get greedy…when they make mistakes. No need to sell…no need to be overly concerned…but absolutely the time to pick our spots more carefully.

Note: Trump is KILLING it on trade. Wilbur Ross, Commerce Secretary and self made billionaire himself, is the freaking man.

We’re seeing some serious broadening patterns take place. There is no more bullish a market. But no…we’re nowhere as cheap as we had been.

This brings us to GDX (Miner ETF). And this chart.


From the initial breakout higher, which the VRA nailed pretty much to the day back in January 2016, GDX went on a tear, rising some 145% over the next 8 months. Then, it crapped out. Hit a big wall, which I completely missed. The result has been the 18 month sideways pattern you see below.

But its not all bad. This sideways action is one of the biggest coiled springs you’ll see. Should it break higher, which I fully expect, we’re looking at a measured move to something like $50 on GDX…or 120% higher than todays $22.50.

But first, we need a move back over the 200 dma. It’s close…just .25 away. Following that, and this will be the real kicker, we want to see GDX top $25/share. When this happens, look out above. And yes, these moves need to take place on volume as well.

Next up, take a look at this chart of oil (USO, Oil ETF). If you like channel trading (I do) and if your like probability investing (I do), oil looks like a screaming buy here. If you wanted to play this for a move higher you may want to use OILU (3 x Oil ETF). OILU has collapsed 25% in just 2 weeks. If my global reflation trade theme is accurate, and with the US dollar looking top heavy (oil is priced in USD), OILU could be an interesting short term play. We’ll take a closer look a bit later.

As a reminder, we use the VRA System to ensure we are on the right side of the market, and in the right sectors, primarily through the use of leveraged ETF’s. Leveraged ETF’s give us the greatest bang for our buck (up to 3 x times the move in broad market ETF’s) while removing the risks of owning a single large cap stock, where anything and everything can go wrong.

However, instead of putting on a new leveraged ETF position…like OILU (3 x Oil ETF)…we will be a bit more patient. We use leveraged ETF’s profit from broad market moves, while our small cap growth stocks give us our opportunity for 100%…300%…1000% moves higher. We’re watching a couple of additional small caps that could be added next. So, we’ll keep our 3 leveraged ETFs in the portfolio now without adding a new position here.

Our goal is to own 10–12 positions, max, giving us the ability to own larger position sizes than would be the case otherwise. This is how we crush Mr Market. Plus, once PM’s and the miners break out, we want to have room to add more back to the portfolio. This is my thinking.

Until next time, thanks again for reading..

Kip

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