VRA Update: Should We Stay or Should We Go?

As I wrote last week, with less than 3/4 of traders expecting the FED to raise rates on Thursday, the risk in the markets is clearly to the downside. 

It's exactly this kind of scenario that beckons all card carrying contrarians to ask the obvious question; should we act with the majority... those expecting the FED to stand pat...or should we take the flip-side of the majority view, sell everything and then go 100% short stocks? Should we stay or should we go?

As uncomfortable as this makes me, everything that I see tells me that there is little chance that the FED acts to increase rates. Instead, this is the most likely scenario that I see playing out. I'll go out on a limb and assign an 80% probability to the following, when the FED announces that they are NOT raising rates:

1) The FED will announce that they will break protocol and will meet again in October (their next scheduled meeting is in November, as they meet every other month). The "hint" being that they may raise rates in 30 days. The drama continues...just as these self-appointed, financial masters of the universe, prefer it. 

2) In their official statement, the FED will announce their reasons for waiting to move; which will highlight a) recent domestic and international (China) volatility/weakness, and the forward affect on US GDP b) continuing slack with inflation expectations, c) US dollar strength d) ongoing destruction in oil (commodity) prices and resulting job losses, and finally e) US wage growth, which continues to lag.

3) The FED will be lambasted widely for the spectacle of it all...just as they should be. Central banks have taken complete control of every sector of the global economy. They can pretend all they want that their desire is to return to a "normalized" interest rate environment, but it's exactly their previous actions of the past 7 years that make this desire impossible to achieve. 

4) Finally, and this is the most salient point for VRA Subscribers, regardless of what the FED does, we will see a massive "relief rally" following the news. Importantly, should the FED raise rates, this rally will only kick in once the initial fall-out is over. At most, I see a decline back to the 8/24 lows...roughly 1000 points down...but quiet likely, not to that extent. 

Should the FED keep rates unchanged, as I expect, the relief rally will begin immediately, with gains of 500 points + in minutes...followed by add-on gains in the next 1-2 days. 

This is as "on the record" as I can be. And no, you will almost certainly not find these kinds of specific predictions elsewhere. If I am wrong, our portfolios will take an immediate hit...there's little doubt about that. Either way, I encourage everyone to keep some powder dry...because the trading opportunities following the FED news should be "special". 

To add credence to my precious FED predictions, there’s a very interesting article in the WSJ this morning about central banks that have increased rates since 2008. More than a dozen central banks have raised rates, only to have to reverse course and then cut them again aggressively…with each now being far below the initial interest rate level where they first raised rates.

But this is the most important point that I could make, regarding the FEDs decision on rates; the Bernake and Yellen FED is the most market'politically driven FED that we have seen...certainly in our lifetimes, if not all time. It's for this reason, above all, that I expect the FED to keep rates unchanged. 

We have to hope that the FED has enough common sense to see the risk of raising rates here…if not, our markets could easily break the old lows from 3 weeks back.

CHINA

China’s markets were down 3-6% overnight, and we can expect this kind of volatility for the rest of the week (in global markets). The issue of the FED and rates is just as large internationally as it is here.

In a normal economy, Chinese stock markets are “still” overvalued, but at 7% GDP growth, not as much...and there is NO place on earth where this kind of growth still exists. I continue to like ASHR…don’t get me wrong…just making sure everyone knows the risks. If the FED raises rates, global markets will get smoked as well.

TVIX

Finally...you may have noticed today's action in TVIX. Even when the Dow dropped 100 points this morning, TVIX could only rise to $13.87 (currently $13.30). All of my previous research and recommendations apply here...when you have doubts, simply pull up that TVIX chart that I sent out a while back. This is just as much a play about the way TVIX is structured (with derivatives that continue to lose value), as it is about volatility decreasing going forward. 

Yes, we may act to trade TVIX going forward, but frankly, this is the kind of short sell that we can continue to keep in place...as long as TVIX exists as an investment. 

NUGT

finally, finally...the previously announced 1-10 reverse split on NUGT has been postponed until 10/1. Recent ETF volatility prompted an investigation into the pricing of leveraged ETF's, but we should expect the split to become effective in two weeks. 

To those that wonder if/when we will see an actual bottom in mining stocks, here's the exact answer to that question. Once we see mining stocks start to rise, while at the same time gold/silver prices are dropping/staying flat at the same time, this will be the sign that smart money investors recognize as the "ultimate" buy signal for mining stocks. Equities always lead the way higher, first...followed by the commodity itself. In fact, you can apply this same wisdom to energy/energy stocks as well...something that I am obviously monitoring here as well.

Let's keep some powder dry…gonna be an interesting week. 

Until next time, thanks again for reading...make it a great week.

Kip