VRA Update: May to October Seasonality. Fearful Investor Sentiment Readings. Q1 Has Been Nothing Short of Sensational.

Yesterday’s late day selling pressure was interesting, as the Dj and S&P 500 closed .81% lower and Nasdaq .40% lower but the Russell 2000 (small caps) actually put in a positive .30%.

But here’s what really caught our attention; the internals were actually flat on the day. Volume, new highs/lows and advance/decline came in a net flat…thats a win for the VRA System. This makes 9/13 days that the internals have been positive, which makes the fact that the S&P 500/DJ has been negative 8/13 days even more interesting.

But here are the facts; May-October is the worst 6 month period of the year and essentially ALL stock market gains have occurred between November to April. The following is from the Stock Traders Almanac and my friend Yale Hirsch:

“Think about this: Every single point made in the Dow Jones Industrial Average from 1950–2016 was made between November 1st and April 30th. That’s an astounding statistic. The Dow gained 20,790.89 points during just these 6 months over 67 years. The remaining May-October months actually lost 64.71 points.”

So no….I’m not blind to the reality of May-October. However, with what you’ll see next from investor sentiment and US corporate earnings, the VRA System still sees little to no chance that a major bear market move lower is in front of us.

Sentiment

Here’s last nights readings from AAII. Bulls at just 28.4% while bears sit at 30.2% and neutral investors at a huge 41.4%. To put these readings in a different perspective, with the broad market indexes just 5–10% below their all-time highs, 71.6% of all investors are bearish/neutral. Folks, I’ve followed this survey since the late 1980’s and while anything is possible, major market declines do not typically occur when investors are out of the market. As a contrarian, these readings tell us that the level of pessimism for stocks is high. That’s rarely a bad thing for the stock market, over the medium to long term (but we’re also not at “extreme fear” readings).

Here’s the weekly sentiment reading from CNN/Money. As of yesterday, this survey sits at “fearful”.

But more than anything, here’s the primary reason I remain optimistic. Thanks to Earnings Scout for these great visuals on corporate earnings and revenue growth of the last 3 years. With 75% of all S&P 500 co’s reporting Q1, earnings are growing by an average of 24.6% with revenue growing by an average of 9.7%. Stunning…

Both the S&P 500 and DJ are approaching their 200 dma, once again, while the Nasdaq and R2k remain some 4–5% above their 200 dma. We want to see these important moving average levels hold. They’re important for one primary reason; they are closely watched by so many.

Reasons to remain bullish

The VRA System remains bullish, with 7/12 screens positive. Being that May is the month that has some investors on edge, as over the last 50 years its been the 3rd worst month. A bit more sideways action may be in order but unless sell-side volumes begin to pick up and the broad markets break through their all-important 200 day moving averages, we must remain bullish.

While European and Asian economies are showing clear signs of showing (as Trumps “America First” policies continue to reduce their US exports/income), the US economy is on incredibly sound footing.

Here are the 3 US economic metrics that matter most:

1) Growth: With earnings growing at a 20%+ annual rate, US growth is in “stunning” mode.

2) Valuation: with a forward p/e of 16, the S&P 500 is now trading at a level that could even be called “cheap” historically, when factoring in revenue and earnings growth of 10–20%/year.

3) Sentiment: two sentiment points matter most. a) consumer sentiment is at a 17 year high (based on late April readings). Animal spirits are back. b) investor sentiment is currently at “fearful” readings. As a contrarian indicator, this bodes well for the markets short to medium term direction.

These 3 measurable metrics tell us that the markets/economy are in excellent shape. My target for 30,000 in 2018 may be a bit on the optimistic side, as it would imply a 7 month gain of 25% from current levels, but the most important point I could make here is that the short term, medium term and long term bullish trends remains “higher” on the VRA System. Sharply higher.

Lets see if a lower open can lead to a mid-day rally and a higher close. The market needs to break this pattern of final hour sell-offs.

VRA Podcast

Lastly, we hope you all have enjoyed the launch of the VRA Daily Podcast. If you have a specific market question or idea you would like to hear myself or Tyler discuss, just send them over. They’ll be out each day by 5PM EST and will be available on ITunes podcasts as “VRA” or you can always listen via vrainsider.com/podcast

Until next time, thanks again for reading…

Kip