VRA Weekly Update: ATH's Beget New ATH's. Sentiment Flashing Buy Signals. Bear Trap in the Works?

Good Friday morning all. Following a solid intraday reversal higher into the close that sent multiple indexes and sectors to ATH (including SPX, Nasdaq, Housing and Transports) the Dow Jones is giving back 2/3’s of yesterday's gains this AM. Earnings continue to destroy their comps of Q1 2020. As Tyler covered in his podcast yesterday, Wall Street analysts were expecting Q1 ’21 to beat Q1 ’20 with 12.2% EPS, but with 40% of the S&P 500 reporting EPS growth is putting up a remarkable 29.3% EPS growth (over Q1 ’20).

Yes, we’re getting a bit of buy the rumor sell the news on the heels of these massive earnings beats, and yes, the internals were weaker than we prefer to see yesterday, but this smells like a “bear trap” to us, in advance of the next catapult higher.

Here’s why:

- Today is the final day of April, meaning fresh fund flows from pensions/retirement funds will enter our markets come Monday. In addition, share buybacks are all the rage again, now posting the biggest buyback totals since before the start of CV insanity.

-We know that May, in post election years, has historically been one of the best months of the year, with avg Nasdaq gains of 3% and 3.9% in Russell 2000, with markets higher approx 90% of the time.

-And we find this data compelling; Going back to 1954, when the S&P 500 is higher by 10% + in the first 4 months of the year (it’s happened 18 x), the rest of the year has been positive 88% of the time with avg gains of 7.4% over the remaining 8 months. As we start trading today, the S&P 500 is up 11.7% for the year to date.

And we have new fundamental research from the all-stars at Evercore that continues to point to a US and global economy that is in early stages of “soaring mode”:

-Retail sales for the month of April (year over year) look like they’ll post stunning gains of 50%, with employment up a big 11%.

- S&P 500 Q2 earnings estimates are $205/share, vs Q2 ’20 of just $112/share, an almost impossible to believe 83% increase!

In major bull markets like this one, dips will continue to be short-lived. We remain long and strong.

Investor Sentiment Flashing Buy Signals

Investor sentiment continues to flash VRA System buy signals. First, the Fear & Greed Index sits at just 62 today.

And last nights AAII Survey came in at 42.6% bulls to 25.7% bears (bulls down a big 10% from last weeks readings).

Before we see a significant peak in the markets we’ll almost certainly see the Fear & Greed index approaching 90 and AAII at 60% + bulls.

“Frothy markets”, to borrow a phrase from the rock star himself, are not commonly associated with readings like above. When we actually get close to a serious market top, every investor and his mommy will be “all in”, believing that there is NO WAY stocks can go lower. Does it feel like we’re in that kind of market today? Or, when the market drops, do you instead get a pit in the bottom of your stomach?

When we’re near the real top, that sinking feeling will be miles away. Circa 2025. Quite possibly Dow Jones 100,000.

This is that bull market.

Fed Update

This week’s FOMC minutes went as expected (no change, anywhere), until Fed Reserve rock star J Powell’s presser where he went off script…again. Powell’s quote that “there is froth in the equity markets” sent the Dow from -40 to -164 at the close, reminded me of Alan Greenspans 1996 line about “irrational exuberance”, which many thought at the time was a warning from Greenspan and would mark the highs for stock prices. It did not. As it turned out, Greenspans warning instead acted as a rocket launcher for higher prices, with markets surging for a full 4 more years into dot-com mania, prior to the 2000 market top and dot-com meltdown.

I look at Powells “froth” warning in the same light as Greenspans. Yes of course, our markets are becoming frothy. But like 1996, our current bubble is just beginning to expand. Without question, Powell and his merry band of global central bankers know this. Trying to slow down a bubble in its early stages with verbal warnings will likely have just the opposite affect. The markets know that they have a green light for much higher prices and we saw evidence of that yesterday in the internals, which were solidly positive across the board, even as the broad markets were lower (only the Russell 2000 finished higher).

This market wants to go higher. Much higher. These Q1 earnings have just been stunningly good.

Until next time, thanks again for reading…

Kip

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