VRA Investment Update: Key Markers Signifying the Birth of a New Bull Market. Semis Hated But Still Leading. Gold Miners Breaking Out.
/Good Thursday morning all.
With 4 days of trading left in the first month of the new year the S&P 500 is up 5.2% with the tech heavy Nasdaq up a massive 9.3%. Should January finish higher it will complete the “bullish trifecta” for the Stock Trader Almanac, joining the Santa Claus rally and first 5 trading days of the new year in being up. When all 3 are higher it bodes exceptionally well for full year results.
We continue to believe that 2023 will be the “year of the bull market”.
This continues to have the textbook markings of the birth of a new bull market. First, we had the October 13th capitulation (top 3 market bottom of my career), featuring a massive 1500 point reversal move higher in the Dow, on bad news no less (a big tell). From the 10/13 lows we’ve seen buy signal after buy signal, first in the Dow Jones, which went parabolic immediately after the October lows (below), and became the first major index to break its 200 dma (late October). The Dow then flashed the first major Golden Cross Buy Signal (GCBS), which was generated on 12/14 (50 dma crossing 200 dma). GCBS are one of my favorite technical buy signals. High probability signals, particularly near the birth of a new bull market.
Having been on the wrong side of the birth of a new bull market I remember the experience well. It’s not pleasant. The bears cannot believe whats happening and “just know” that the next shoe is about to drop, crashing the market in the process. But bull markets love climbing a wall of worry…thats what I believe is happening now…and in the process they leave a trail of identifying markers.
We’re seeing these bull market markers now, each of which comprises important screens for the VRA Investing System.
1) Ugly opens are met by strong buying pressure. We’re seeing this play out repeatedly.
2) The final hour of trading (the smart money hour) is consistently bullish. This is happening day after day.
3) Key leadership groups/stocks rise on bad news. We’re seeing this play out on less than sterling Q4 earnings.
4) The market internals continually improve, even on bad days. As a reminder we just had a rare “momentum breadth thrust” in mid-January. This technical buy signal has consistently marked the birth of a new bull market (back to 1950).
5) We see the markets strength below in the percentage of stocks trading above their 200 day moving average (dma), which just hit a new 52 week high of 66.60%, but remains well below its 2-year highs of greater than 90%.
6) Golden cross buy signals start occurring everywhere, where the 50 dma crosses the 200 dma. Exactly the set up today, with key GCBS in the Dow Jones, Semis, Small caps, financials, the S&P 500 and gold, silver and the miners (GDX). Remarkably strong technical buy signals, particularly at the birth of a new bull market.
7) And finally, one of our top buy signals remains in place. The semis (SMH) continue to lead the markets higher. When the semis are leading there is not bigger buy signal for the broad market.
The semis are the ultimate tell.
As seen below, the semis…even after this monster move higher…are still hated and under-owned. This helps to explain why wall street hedge funds and money managers get beat by the markets consistently.
They act as a crowd…loving safety in numbers. Being a world away from NYC, here in Texas, has been “enlightening” to say the least.
Final point on the semis, they are nearing extreme overbought on steroids on the VRA Investing System, our most overbought designation.
This is not a sell signal…we expect the semis to continue to lead this new bull market higher…but we are pausing our purchases here, waiting for a pause/pullback.
GDX (Miner ETF)
This is a remarkable chart pattern thats developing in GDX. A rising wedge that is nearing going parabolic. Tyler covered this in detail on his podcast yesterday. As he also explained, the lower US dollar is just another buy signal for this group. GDX led the markets again yesterday, closing up 1.6% to a new 9 month high.
Another VRA System note here; GDX is also nearing extreme overbought on steroids. We will soon pause our purchases here as well.
BTW, NUGT is up 125% from its Q3, 2022 lows.
Here we see that GDX continues to outperform the underlying commodity (gold). Big buy signal for the group.
Overall, our views are unchanged from the 10/13 capitulation lows; the dollar, interest rates and inflation have all peaked and US stock markets have bottomed. We will continue to use pullbacks to add to positions.
And the historical data is as powerful as I’ve seen in my career.
Consider These Powerful Analytics:
One: History tells us that the worst years for stocks are followed by some of the very best years on record. As seen below, since 1950, following a 20% decline in the S&P 500 the market has been higher 100% of the time with an average gain of 27.1%. Again, the S&P 500 finished down 19.4% with Nasdaq down a stunning 33.1%.
Two: Importantly, and this remains the most powerful piece of analytics of my 37 year career; since 1952, from the midterm lows to 12 months later, the S&P 500 has had an average return of 32% with gains in every single post-midterm year (18 for 18).
Incredibly bullish for 2023.
Until next time, thanks again for reading.
Kip
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