VRA Weekly Update: Wall of Worry. The Markets May Soon Start to Care About These Bricks.
/Good Friday morning all. The wall of worry is building. Cracks in the market are appearing. While our VRA Investing System remains at 10/12 screens bullish (Don’t fight the tape, Don’t fight the Fed), with a global economy that is in solid shape, we’re about to head into December. Anyone remember what happened in December of last year? So do a lot of investors.
We’re not bearish…but we’re also not going to add new positions. Importantly, our small-mid caps should be in good shape. Lower beta’s, based on their relationship to events, news and upside potential. And we like PMs’/miners here very much. GDX to gold ratio looks to be giving us a new buy signal, as covered on Wednesdays Members podcast. The previous 3 buy signals have produced GDX gains of 28%, 35% and 45%…all inside of 3–7 months.
Here’s what we see that’s building our wall of worry. And know this; as the wall first starts to build, it’s common that the markets first pay attention to it, with downside action. Then, once the wall has gone up, and as investor sentiment becomes increasingly bearish, the wall then serves as important support for the markets. This is the next great buying opportunity that we are waiting for. And this ST sell-off could last all of a few days to a couple weeks. Again, we’re not looking for a dramatic downside move…but its almost always “escalator up, elevator down”.
Here’s the wall that looks to be going up:
-After yesterdays mixed/negative internals, we’ve now had 12/13 days with mixed/negative readings. No Bueno. In addition, we’re seeing some leakage in our market leaders. Tech/Semi’s/Growth/Momentum beginning to reverse a bit.
-Bitcoin is getting hit ($7000). If you’ve been here a bit you’ll remember what we’ve been reporting for a couple years. Not that we can fully explain it but $BTC has been the single best “risk-off risk-on” signal indicator for equites for more than 3 years now. BTC has led the next major market move by a few days to a couple weeks.
-Trump impeachment in the House. The markets haven’t cared to date…but in our view it’s likely that at some point they may. This morning Trump said that he “wants a trial in the Senate”…which sounds very much like he expects to be impeached in the House. High drama…just remember why Trump wants this to go the Senate; R’s have complete control. Trump friendly senators will be able to force appearance/testimony from people like Hunter/Joe Biden….all tied to Fusion GPS and phony Russian dossier…Comey, Brennan, Clapper…and who knows, maybe even HRC herself. High drama indeed.
-China trade deal. Looking increasingly unlikely that a phase 1 deal will get done. If not, look for Trump to bump tariffs even further. The markets haven’t come close to factoring this in.
-Pelosi announced yesterday that there will be no USMCA trade deal this year. Again, another big plus for the markets that won’t take place. D’s aren’t giving anything to Trump. This is a death match.
And there’s this; the NYSE advance/decline line has fallen to 3 month lows. This looks to be an important divergence, telling us that market breadth is failing.
VRA Bottom Line: we don’t like being caught flat footed. We don’t like buying high. The next 1–2 weeks look to be a risk-off environment. And we would love to be wrong. Our year end target has been DJ 30,000 for more than 2 years. We’re biased. We want a melt-up into year end. To those asking “should we short something?”. We prefer not to short much of anything in bull markets. Our discipline. We would rather wait for a pullback to add a new position on the long side. As always, we’ll alert you each step of the way.
Since 2014 the VRA Portfolio has net profits of more than 2300% and we have beaten the S&P 500 in 15/16 years.
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