VRA Update: Short Term Correction Leading to Next Ramp Higher
/For the last 2-3 weeks, a quiet but consistent internal correction in the markets has taken place. Take a look at the chart below on the S&P 500 and you'll see just what I am talking about.
That line across the bottom connects the lows in the S&P 500 since March...and yes, each time that we have come down to this line the markets have bottomed and moved sharply higher. Will recent history repeat? You know my views...the markets are going significantly higher...but don't take my word for it. Take a look at the most recent sentiment numbers from the "Bloggers Poll", which has become the best inverse sentiment indicator that I follow.
As you can see, 56% of all polled are now bearish...which is the most bearish that this indicator has been since the October '14 lows. The Dow was 16,000 then and a quick 13% rally of 2000 Dow points was about to get underway. And yes, this is exactly when the VRA Trading & Investing System was screaming "buy" as well.
Next, let's take a look at the US Dollar. As a reminder, the USD went parabolic in the 4th quarter of last year...crushing US corp earnings and leading to gobs of so-called top currency experts predicting that the Euro would go to parity versus the USD. But then, the VRA made a bold call...in fact, I was the first that we can find that made this call. I said "the USD has topped out and would reverse course sharply against the Euro"...that exact day marked the top for the USD and the exact bottom for the Euro. Below is the USD chart that I referenced in mid April, with the topping action now clearly in place.
Since hitting oversold levels in May, the USD has now topped out once again...in what I can only refer to as "perfect technical action".
Why do I seem so obsessed with the action in the USD?? Here's why; if my research is correct, the counter-move higher in the dollar looks to me to be over...which is coming at the exact time that sentiment on stocks has moved from overly bullish to overly bearish...and is also coming at a time when the overall markets are reaching significant support levels (refer back to the S&P 500 chart above).
BOTTOM LINE: as most of you know by now, our most consistent 100-200-300% returns have come from using the VRA Trading & Investing System. More specifically, waiting for "extreme readings" from the System before acting, either on the broad markets, stocks or options. The question now becomes, have we reached short term bearish extremes on the broader markets?
Here's the answer: I would prefer to see a total wash out day...the kind of day where the markets open sharply lower...on some kind of macro specific bad news...just scaring the sh*t out of everyone. But...the markets don't always give you exactly what you're waiting for, so we may not get that opportunity. For now, just know that the S&P 500, the Dow and the Nasdaq are each at highly oversold levels. On top of that, both sentiment and the dollar look to be giving us strong buy signals for stocks. As I've been saying, make sure and keep some powder dry...we are very close to initiating new positions (most likely call options on the Russell 2000, and a leveraged broad market ETF... IWM).
VRA FORECAST: BULL MARKET IN JUST THE 7TH INNING
While US stock markets are up just 1% or so this year, intl markets have ripped higher, with Japan, Europe and China up big (mainland China's up a whopping 50%).
The recent pause/correction has been brought on by macro concerns about issues like: a) the FED raising rates, b) Greece leaving the EZ, and c) potential slowdown in the US/global economy.
Let me repeat: a) stock markets actually RISE when the FED begins to increase rates. I fully expect a 2000 point move higher in the Dow...within just 2-3 months of the first rate increase (likely in September) b) Greece will NOT leave the EZ...I see the odds at less than 20%. My only question is; once a deal is reached, will we get apologies from all of the "same song, second verse global fear-mongerers"? You know, the same "gurus" that have remained bearish on stocks during the entirety of this bull market?? c) Does anyone reading this actually believe that the US economy is contracting in size? How 'bout China, and their middle class of some 300 million...does anyone reading this believe that China is contracting in size? Is Europe and their $1.2 trillion in QE in contraction? Europe's massive QE program that will extend long past their September 2016 end date (again, I fully expect European QE to reach $2 trillion in size and end sometime in 2017/2018).
BROKEN RECORD TIME (my apologies...but these points continue to be incredibly important):
1) Bull markets do not end until the public is fully invested in stocks...with just 35-40% invested today, we have a long ways to go before we hit 60-70% (which has marked EVERY bull market top since WWII). And folks, please don't forget this most important point: the biggest moves in every major bull market (on record) come in just the last couple of innings. My research has us in the 7th inning...by the time the bottom of the 9th rolls around, the Dow will likely top 25k (just 17,770 today).
2) With interest rates near all time lows, where else are investors to allocate their retirement funds? This point should be so powerful that I'll leave it without additional comment (at least in this update...I've covered it plenty in the past).
3) Massive global QE/money printing, stimulus, low rates...it's been clear for some time (5-6 years) that central banks globally want stock prices that are MUCH higher. In what I can only refer to as "stupidly stunning", perma-bears continue to fight the tape and fight the FED...at some point they will ALL throw in the towel...and of course, that's when we will be taking profits and going VERY short the markets. We just aren't anywhere near that point...that's an end of 2016 story (my crystal ball works best over about 3 months, so yes, an 18 month prediction is pushing it...I get it).
VRA PORTFOLIO UPDATE:
The last 3-4 weeks is the least active that the VRA has been in the markets for over a year...and that's not been by accident. Prior to this, we booked net gains of more than 300% in the previous quarter, along with net gains of more than 1500% since the beginning of 2014. No doubt, I'm certain that you would prefer we book these kinds of gains consistently...day after day, and week after week. Hey, who wouldn't?
But folks, I've learned something very important over the years...in fact, its a lesson that we all learned as kids...you can't fit a round peg in a square hole. As simple as this lesson is, if you violate it in the stock market, you'll also experience very real losses...along with very real pain.
So...we will remain patient...we've done far too well to give back our gains.
Kip Herriage
vraletter.com
