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

VRA Investing System, Overbought Market Pause. Fed Rate Hike. Investor Sentiment.

Good Friday morning all. I’ll be on the Wayne Root Show tonight at 8:30 EST, listen watch via NewsMaxtv.com or USARadio.com

Market update

Yesterday brought mixed/negative VRA System Internals for the 3rd consecutive day, as end of quarter window dressing by institutions results in portfolio rebalancing. Both the DJ and S&P 500 continue to work off their extreme overbought conditions, as we leave September (historically the worst month of the year) and head into the seasonally bullish October-May time frame.

We see no structurally negative issues in this market. We see a market that’s building energy, with powerful fund flows into US equities that continue to overwhelm would be sellers. The most pressing negative could be share buybacks, which are halted for companies soon to announce Q3 earnings (4–6 week blackout period).

9/12 VRA System Screens remain bullish. The rising tide of a strong US economy should result in broad based moves higher. My views have not changed. We are in the early stages of a broad based market melt-up. Dow Jones 28,000 by mid terms and 30,000 by year end/early Q1.

I do have one note of caution. As Q3 ends, we will increasingly see co’s that are forced to suspend their share buy back programs, as the 4–6 week SEC imposed “Blackout Period” goes into place. Co’s that will soon report earnings must suspend their share buybacks for 30–45 days (there are exceptions and each co’s blackout period is different). Still, with buybacks on track to top $1 trillion this year (for the first time in history), its a macro data point that we must be aware of.

Bottom line: if we’re going to get a sell-off prior to the seasonally bullish October/November to May time frame, right about now could be that time.

Russell 2000 (IWM)

While big cap indices have hit extreme overbought readings, take a look at this 1 year chart of IWM (Russell 2000 ETF). Small caps have traced out a repeating stair step pattern over the last 12 months, with each pause creating the next important buying opportunity. While not yet at extreme oversold levels, small caps have performed so powerfully this year that its likely they will not hit extreme oversold. The VRA Portfolio holds a number of small caps. I continue to look for a melt-up move higher into year end.

FED Rate Hike

The Fed raised rates for the 3rd time in 2018, as we have discussed here, the markets do not fear rate hikes…rising interest rates have been ultra bullish for US economy and equity markets. Next up, as European and Asian bond markets begin to normalize…as interest rates move higher there as well…we can expect international GDP growth to pick up, with a catch-up move higher in many European/Asian equity markets.

Finally for this morning, here is this weeks AAII Investor Sentiment Survey. 36% bulls with 31% bears…not even close to sniffing investor euphoria. Remember, I see no significant market top (meaning that dips must continue to be bought) until bulls hit 70%, for weeks on end.

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

Kip

Chess and Investing. VRA Investing System Update and Our Dominant Investment Themes

No doubt, many of you played chess growing up. Many of the worlds best investors do. Chess and Risk, those were our games of choice. If you’ve never played a really good chess player, it’s most similar to playing a good poker player…you feel like they’re renting space in your head. I was decent at playing a few moves ahead, but the great players, they see it all.

Many believe that the best chess player of all-time was Paul Morphy, from the mid-1800’s. As a child prodigy he beat many of the worlds best, from the ages 9–12, after learning the game by simply watching his father and uncle play a few matches. Morphy was born to play chess.

In 1858, Paul Morphy played 10 players at once…while blindfolded. He made 250 moves in twelve hours, an average of 27 per game. This gave two minutes for each move and and forced him to form 570 complete mental pictures in twelve consecutive hours, with each picture representing the exact mode in which all the sixty-four squares in a chess board were occupied.

Of course, Morphy won all 10 matches. The event immortalized him as the best ever with the NY Times introducing what may have been one of their first attempts at “fake news” by referring to Morphy as “rumored to be a mystic”. How Morphy must have loved that…

Today, as we battle against Wall Streets computer algorithms and high frequency traders, even a man of Morphy’s talents might come up short. But folks, as we covered in some detail in yesterdays VRA Update, this is why I built the VRA Investing System. This is why I paid close attention some 30 years ago as my mentors taught me how to analyze co’s and personally speak to/get to know CEO’s and mgt teams. Maybe Peter Lynch, the investing legend of Fidelity Magellan fame, said it best; “the best investors invest in what they know.” The VRA System is what I know.

VRA System Update

Labor Day has come and gone…Wall Streets summer break is over. While September has historically been the worst month of the year, lets not forget that the markets just went up 5 months in a row…during some of our most the hostile months, at that (April — August).

So, what happens next…historically speaking…after the S&P 500 goes up 5 months in a row?

Going back to 1954, following 5 consecutive months of gains, the S&P 500 was higher 100% of the time (over the next 9 months) with a median gain of 9.8% and higher 96% of the time (over the next year) with a median gain of 11.5%.

Yes, the VRA System still sits at “extreme overbought” levels. And yes, from a timing point of view, the time to aggressively buy US broad markets has passed. That time was back in April, when we were pounding the table to “buy buy buy”, once our markets reached “extreme oversold” levels.

Still, as my mentors taught me; “it’s not a stock market…its’s a market of stocks”. And our favorite growth stocks/story stocks remain a “strong buy”.

If you’ve been with us for any length of time at all, you know that we’ve been big-time bullish from the election on. Remarkably, our perma bears continue to tell us that the sky is falling, each time we have an overbought sell-off. Like a broken clock, one of these days they’ll be right. Until then, we will remain long and strong.

As of today, 9/12 VRA Investing System Screens remain bullish. Yes, we remain at “extreme overbought” levels in VRA short term momentum oscillators, meaning that more downside action is possible. But also know this; in major bull markets…like todays…any pause/correction is typically short lived.

Note: I’m often asked “what’s my biggest concern about the stock markets?” Outside of being blindsided by a “black swan” event…a major terrorist attack, like 9/11….a flash crash…Japan government debt crash, etc., here’s my biggest short term concern; check out the countries with the worst performance over the last year. 10 country ETF’s with 40%+ losses. On this point, I find myself in complete agreement with the perma bears. Should these losses continue to build, my primary working theory that “a rising tide lifts all boats”…the US economy/markets representing the “tide”…could prove to be incorrect. Today, I put the odds at 70/30 that a soaring US economy will lift the rest of the world. The US economy will continue to be be the growth engine for the rest of the planet, just as its been since WW2. But should the losses below accelerate, 70/30 won’t hold for long. Watching closely….

To receive our most up to date, in depth analysis Sign up to join us at the close each day for 5 minutes of everything that matters most…but only if you want to crush the markets with us! www.vrainsider.com/podcast

Tyler recorded the VRA Investing System Podcast yesterday, and it so perfectly reflected both my and the VRA Investing System view that we’re including it here this morning. You’ll hear our dominant investment themes along with our continued views for a sharp rally higher, into year end and ‘19.

Until next time, thanks again for reading…

Kip

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

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VRA Update: Positioning for the Melt Up. VRA Macro Themes. Global Chart Analysis.

Good Thursday morning all. Bit of a pause in US markets yesterday, if you could even call it a pause. Once new all time highs are hit, some consolidation usually takes place. But I don’t expect this pause will last long. We are in the beginning stages of a melt-up in US equity markets. Short term, yes, we’ve reached overbought levels, but I don’t suspect it will matter much. The US economy is just too strong. The US consumer has animal spirits. Stock markets are about to soar.

If you’ve been with us a while, you may remember my most important macro themes:

1) Trump is an economic Godsend. Period. I caught a ton of flack for saying this back in early 2016, then finished my book just as the election was taking place. Becoming Wealthy in the Age of Trump, indeed. Strongest US economy in at least a decade and just getting started. 4% GDP will once again become the norm. Boom time, dead ahead.

2) Nationalism is once again replacing globalism…a more powerful worldwide economic movement you’d be hard pressed to find. True global competition is changing everything. The strong should survive and prosper. The weak must learn from their mistakes, or perish. Pretty simple concepts to understand, but for 3 decades our feckless and corrupted political class forced globalism down our throats. And man, did US jobs, middle class and manufacturing pay the price. Bottom line, this is the single biggest reason that Trump won. Americans knew that our greatness was slipping away.

3) A strong US economy equates to a strong global economy. This has, unquestionably, been the case for as long as anyone reading this has been alive. We have the Greatest Generation to thank for this fact. Here’s what this means; as the US economy continues to surge, it will take most all global economies with it. A return to nationalism, fueling the fire. A rising tide lifts all boats…the US economy as the tide.

Lets go through some global charts this morning. I believe they are confirming that a global boom is building. But first, Aramco has supposedly put their multi-trillion $ IPO on hold. As you can see from my tweet, I’m not that surprised. This global economic recovery will take oil past $100/barrel, which would put another $1trillion + in the hands of the Saudis. No rush…but it will still happen.

GLOBAL EQUITY MARKET LEADERS. BULLISH PATTERNS BUILDING

1) Japan’s Nikkei. This well defined triangle is building into one helluva a coiled spring. Japan may have lost some economic luster, but with the developed worlds highest Debt to GDP ratio, the world needs Japan to prosper. This chart tells me that a major breakout move higher is coming. Highly bullish for global markets (equity, debt and currency).

2) EEM (Emerging market index). Trumps takedown of China, plus rising US rates/dollar, have been brutal for emerging markets. Below is a well defined bearish wedge, but should the move higher continue…as I fully expect…once this resistance line is broken we’ll be talking about a falling wedge pattern that has turned to bullish. You know my thoughts here…Trump will strike a trade deal with China prior to the midterms. Likely in the next 30–45 days.

3) Germany. Largest and most important European economy. While I did not draw in the lines here, we see another pattern of higher lows and a developing triangle pattern. Germany has its own share of domestic/political issues, but what they do not have are financial issues. Best balance sheet of any global economic power. Look for Germany to bounce back in a big way.

4) Finally, the STOXX 600, made up of the largest 600 co’s throughout Europe. Again, another well defined bullish triangle, developing into its own coiled spring.

Soon, we’ll be out of August and It’s time to make sure we are positioned for the coming melt-up, I expect we’ll see fireworks!

Until next time, thanks again for reading…

Kip

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VRA Update: A Strong US is a Strong Global Economy. US — China Trade Talks Back On. Lowest Youth Unemployment in 52 years!

Good Friday morning all. Following a big (bullish) day higher yesterday…with solid market internals… here are my thoughts this morning.

Buy the dip is evolving into “aggressively buy the dip” for US stocks. This bodes well for our markets as we finish the year out. Again, with just 36% bulls on AAII Sentiment Survey, we never came close to “investor euphoria”. Investors falling in love with stocks is a near requirement before we have a final bull market top. That has been exactly my experience for 33 years.

Housing Technicals v. Fundamentals

In our conversations around housing, I came across this yesterday. Housing starts have slowed, yes, but in May they hit their highest levels in 11 years. As you can see below, housing tends to top a full year before the next recession hits. Simply nowhere near this today.

The housing market/real estate slowdown is much more structural in nature, mostly due to SALT revisions inside of Trumps tax reform. Trump was right to insist on these, even as he knew that it would mean a short term hit to the housing market. High tax states have their own issues to worry about…and that does not mean they should be the rest of the counties financial burden to bear. So, while technically, housing looks horrible, fundamentally, I see very much to like about the US real estate market.

Global Markets

45 global stock markets are lower on the year. This, along with the action in housing stocks, commodities and VRA market internals, is why the VRA System has dropped to 8.5/12 screens bullish. Still bullish, yes, but this action cannot be ignored. But my dominant macro theme remains unchanged; a strong US equates to a strong global economy. And folks, this is when the tide needs to turn. Further aggressive downside action in global equity/currency markets is NOT what we want to see. I believe a turn higher is next.

This is also when I’d like to make a major macro point…one that applies to pretty much all commodities as well as global/emerging market economies/US markets. As you know, I didn’t buy into the fear based MSM that said the Turkish currency crisis would take the rest of the financial world down with it. And it was the action in gold that told us this (gold always spikes higher in times of global currency crisis…but gold has gone the other way).

Turkey is taking action to prop up its currency by banning short selling and news that Chinese regulators are freezing approvals of news game licenses coupled with a poor earnings report from Tencent Holdings (TCEHY) is causing breakdowns in some of the best performing China stocks during the past year. Trade issues also continue to weigh heavily on China….pushing the indices into bear market territory.

As we discussed in our VRA updates to members, emerging markets/China are approaching their most oversold levels (to US markets) in 2.5 years. Does not mean they cannot continue lower, but when markets reach extreme levels of oversold conditions, we know that the weak hands have likely sold their positions…this is how significant, major market bottoms take place. August is commonly that month in emerging markets.

Also, know that China has had their clock fully cleaned by Trump. Yesterday we learned that trade talks are soon to be back on. Global markets are rallying on the news. It’s my continued belief that August will prove to be the best buying opp of the rest of ‘18.

Lastly on this topic, the AP had an interesting read this week on the developments in emerging markets….those same economies that were allowed to steal US jobs, wage growth, and GDP over the last 3 decades. But there’s a new sheriff in town. Those days are over. Now, with US interest rate normalization, a strong dollar and a booming US economy, foreigners are piling into US investments (of all kinds). Hugely bullish for US markets.

And the US earnings bonanza rolls on. With 459 S&P 500 co’s reporting to date, 80% have beaten estimates on 26% earnings growth. For those that bought into the lefts argument that “supply side economics does not work”, you may want to take a second look at whats happening in just 1.5 years under Trump.

Here’s what does not work. Open borders, big business globalism. We allowed our masters of the universe to import cheap labor while exporting US jobs, manufacturing and GDP at the same time. A recipe for economic destruction. Slowly but surely, we’re seeing a global wake up call to the abject failures of globalism. The answer to economic prosperity lies in true competition…not in manipulated economic policy that picks winners and losers. True capitalism is the source of economic prosperity. History has proved this point, without question.

Again, the biggest issue facing the markets right now is seasonality. We are in one of the slowest and most negative times of the year…there isn’t much of an appetite, or investors around, to aggressively buy weakness.

Lowest Youth Unemployment Rate in 52 years!

Kids are headed back to school and Wall Street will soon head back into the office. As we’ve discussed, August is the most common month for emerging market currency panics, just like the one we have seen develop with Turkey this month. Not only do I see no signs that the US economy is slowing, instead, I see continued signs that our economic ship is being righted. We cover these facts here regularly, but here’s a new one…from late yesterday; the youth unemployment rate just hit a 52 year low. What a good sign for our future!

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

Kip