VRA Investment Update: The Repeating Pattern of Extreme Overbought Markets. Biden Must Be an R. 2A
/Good Thursday afternoon all. There’s been a repeating pattern over the last 18 months that’s been as reliable as clockwork; once the broad market indexes hit extreme overbought on our VRA short-term momentum oscillators (stochastics) the markets then reverse lower. This took place yesterday, looks to be taking place again this AM and may continue into next week.
As to how long this pause will last, the bottom line is that it just takes time. Best guess here is something like middle of next week before these extreme OB conditions wear off. However, if US markets find a way to continue moving higher, even in the face of being extreme overbought, it would be one of the most bullish signs an investor could see.
Overbought markets that continue to move higher are “highly bullish” market timing signals. Regardless, this overbought pause should be just that…a pause.
As overbought as we might be in the short term, this market just keeps acting like it wants to go higher.
If you watch much financial MSM you’ve almost certainly noticed the difference in tone. Instead of “buy the dip” we’re getting lots and lots of “fear”.
Not the kind of reactive commentary that we hear at market tops….but very much the kind of commentary we hear near market bottoms.
Yes, investor sentiment is that important.
As to the 3% 10 year, since you’ll hear no one talking about this today, allow me; a 3% yield on the 10 year t-note might seem high but that’s only due to our financial MSM’s poor memories. While yields have been plummeting in the US for 40 years (until this inflationary melt down in bonds), as an example, during the dot-com melt-up the “average” yield on the 10 year was better than 5% (as seen in the chart below). Even today, as we’ve just had the worst 8 months in the history of the US bond market, a 3% 10 year has left the descending trend line of the last 40 years intact. We would need to break 3.8% yield (roughly) to violate this all-important trend line.
The big picture remains unchanged; interest rates remain incredibly low
Between Fed Chair J Powell and yours truly, one of us has yet to change his views over the last 8 months or so. It’s still my “highly confident” opinion that the Fed will push the US economy into a recession if they take the Fed Funds rate past 2% (its 1% today). In no way, shape or form will the Fed be able to hike rates aggressively…just not going to happen. Instead..and again, my views are unchanged…by 2025 (or so) the yield on US 10 year t-note is likely to be negative. Financial engineering is still in the early innings. The US economy is far more fragile than the Fed is admitting to. They will make another major policy error unless they soon change course.
Ray Dalio (Bridgewater) agrees with Tyler and me. Soon, economic reports in the US will make clear that the economy is slowing…likely radically.
After all, Joe Biden (the kiss of death) is president. Enough said.
Energy Stocks At 99th Percentile Overbought
We are waiting for our opportunity to add to our energy positions in the VRA Portfolio…but based on VRA Investing System readings, that time is not now.
XLE (Energy ETF) is hitting “extreme overbought on steroids”and is now trading 43% above its 200 dma, the highest levels of overbought in 8 years.
The move higher over the last 2 weeks has also occurred on light volume. As much as we love energy stocks for the medium-long term, our investing discipline prevents us from adding to positions.
There are two major reasons to remain hyper-bullish…yes, even at this level of overbought. The global supply/demand story could hardly be more bullish. The smartest people I know believe that oil is headed to $175–200/barrel.
I think they are right. Secondly, energy stocks make up just 5% of the S&P 500. Stunning really…and heavily bullish.
On pullbacks, we will be buying energy stocks…aggressively.
Note: natural gas is “not” overbought and looks excellent on the charts.
Here’s the other reason to be concerned about energy stocks in the near term; Jim Cramer (like Biden, another kiss of death) is recommending that investors “should buy any dip in oil stocks”
Seriously, Biden MUST Be a Republican
If I want acting advice, I’ll go to Matthew McConaughey.
When it comes to the 2A, I’ll use the constitution.
Want to fix our broken system and eliminate 90% of gun violence and mass shootings?
It’s not complicated….not even close to being complicated.
Until next time, thanks again for reading…
Kip
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