VRA Investment Update: From the 10/13 Capitulation Lows and Birth of a New Bull Market to 'Overbought". Repeating Pattern Buy Signals.

Good Friday morning all. From the 10/13/22 capitulation lows we’ve been witness to a textbook “new bull market”. It’s only just the beginning of a new bull market…one that should last years…just know that we have hit heavily overbought readings on the VRA Investing System (more on this later):

Here’s what I wrote on 10/14/22, when we called the “capitulation bottom” in stocks, the highs in the US dollar and when we began pounding the table on the semis (SOXL) along with our favorite VRA Leveraged ETF’s:

"VRA Letter: Extreme Fear Meets Capitulation. Textbook Reversals Point to Major Move Higher.
October 14, 2022

The ugly market action of the last 2 months has seen the Dow Jones and S&P 500 fall 16-18%, while the tech heavy Nasdaq has collapsed some 23%. As a discounting mechanism, the markets have  built in an extraordinary amount of bad news. And, as we’ve covered here often, an overwhelming combination of analytics (going back 70-100 years plus) tell us that a powerful cycle move higher is dead ahead...into and post midterms…which historically has been the best 12 months (plus) on record to own stocks. 

But this market needed one important event…it needed capitulation. Welcome to yesterday.

With a 1500 point reversal in the Dow Jones, following another disappointing CPI report, extreme fear just met capitulation. It’s highly likely that this classic looking capitulation will mark an important market low. 

As we’ve covered here often, 10 days ago the US dollar put in a bearish engulfing candle (topping signal). 

Yesterday, the S&P 500 put in a “monster” bullish engulfing candle (below). Combined, these are high probability technical signals that point to the highs being in place for the dollar and the lows being in place for stocks.  

In another classic sign of extreme fear, global money market funds just saw $89 billion of inflows for the week, the largest weekly injection into cash since April 2020, the week that the stock mkt bottomed following the coronavirus insanity crash. 

In addition, mutual fund managers are holding a record amount of cash, also breaking the previous record from April 2020 (also at crash lows).  

VRA Bottom Line: With cash levels at all time highs for money markets & mutual funds and with portfolio managers equity holdings at record low levels and with yesterdays clear case of capitulation, it’s likely that a significant rally into midterms & year end is underway. 

SMH (Semi ETF)

On Wednesday we focused on this chart of market leader semiconductors. We have aggressively added to positions (SOXL, 3 x Semi ETF) and will continue to. From here (SMH), a move back to the upper trend line will mark a 26% move higher in SMH. Should SMH jump 26%, our 3 x leveraged SOXL will ramp approx 78% higher."

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As you can see above, the 10/13 capitulation lows marked THE lows for stocks and marked the highs for the US dollar, interest rates and inflation. 

- Everything post 10/13 has been recovery mode for US markets and a 'buy the dip' opportunity. 

- We’ve entered the best year of the Presidential Cycle, with average gains of better than 20%. 

- History tells us (clearly) that the worst years for stocks are followed by superior years for stocks. US markets just had the worst year since 2008 with the S&P 500 -19.4% and Nasdaq -33.1%.  

- In addition, we’ve entered the best month and quarter in the Presidential Cycle, meaning that both January and Q1 should put up significant returns. 

Check out the charts from last week's VRA Investment Update

Here are our (post 10/13/22) VRA ETF Returns:

- NAIL (2 x Housing ETF): +105%

- SOXL (3 x Semi ETF): +101%

- NUGT (2 x Miner ETF): +104%

- TNA (3 x Russell 2000 ETF): +40%

- URA (Global Uranium ETF): +19%

- ERX (2 x Energy ETF): +37%

We have all of these bullish analytics just as bearish investor sentiment is screaming “buy stocks” (contrarian buy signal). Consider that bears have exceeded bulls for 41 straight weeks in the AAII Investor Sentiment Survey, which I’ve voted in for more than 30 years, for the first time ever. In addition active money managers in the NAAIM positioning survey show just 39% have any equity exposure at all and the final weeks of 2022 saw heavy flows out of equity funds. When everyone is bearish, the smart money contrarian must be bullish. 

We see this sentiment reflected in this chart of tech out-flows (below). Last year investors dumped their favorite tech stocks…Amazon, Apple, Google, Tesla, etc...like they were red-headed step children. Folks, when record levels of selling start taking place in “any” group, I get very interested in buying them. Classic buy signal. 

VRA Strategy Note: CPI Cools, taking us to overbought levels

December CPI data came out yesterdy and it came in pretty much exactly in line with estimates as the headline rate of inflation fell to its lowest level since late 2021. Regardless of what Fed speakers might have to say (our financial masters of the universe have to get their TV time in), the Federal Reserve will soon stop raising interest rates.

Official data showed the CPI fell 0.1% from November, bringing the year over year change to 6.5%, down from 7.1% the previous month. The monthly drop in the index was below forecasts (for no change), but the annual rate was in line with consensus.  We remain long and strong this market. Gold is headed higher on the news ($1914) and is about to put in its Golden Cross Buy Signal.

Know this: the Fed is, once again, completely over their skis. They were right 1 year ago to call inflation “transitory”, they just didn’t know what the definition of transitory was. Today, inflation is plummeting. We’ll soon have deflation. This is what the bond market is screaming at us, as the 10 year yield has imploded from 4.33% in late October to just 3.45% this AM, a stunning collapse in just 2.5 months

By year-end the 10 year will have a 2 handle. 

We see the reality of whats taking place in the bond market below, in the chart of 10 year yields. Remember, J Powell and his merry band of money printers is telling us that they will take the Fed funds rate past 5%, even as the 10 yr yield is going in exactly the other direction. The Fed NEVER leads…they only follow. The bond market is calling Powell’s bluff. 

Heads up; US markets are now hitting heavily overbought on the VRA Investing System, just as everyone seems to be joining the VRA in calling this a new bull market. No, this newfound love of stocks by the “gurus” is not the kiss of death but we should not be surprised to see some distribution (selling) take place. 

This is NOT a sell recommendation. We own great ETF positions that have yet to reach extreme overbought. However, in our accounts we have paused any new ETF buying and will wait for a better opportunity to add to positions. 

This does not impact our VRA 10-Baggers. We continue to use monthly dollar cost averaging to add to them. We’ll update you daily as to changes in VRA System readings. 

Walter Deemer: Wall Street Vet Sees "New Bull Market" on Rare "Breadth Thrust"

The study of breadth thrusts is very niche. We look to seasoned pros like Walter for these studies.  
The VRA Investing System heavily incorporates the internals, which is the foundational action for what Walter follows (below). We’ve seen that turn in the market internals from the 10/13 capitulation, which is when we started calling a bear market bottom and likely the birth of a new bull market. 

* Final note: Q4 earnings season kicked off today with big banks reporting. So far, better than the bears expected, a trend that I expect to continue for Q4 earnings. We are simply nowhere near a recession in America. However, that may be a 2nd half 2023 story. 

Until next time, thanks again for reading. Have a good weekend. 

Kip
 

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