VRA Investment Update: Market Update; Rate Cuts Are Nearing; Don't Fight the Tape, Don't Fight the Fed.
/Good Thursday morning all.
This morning the Bank of England’s messaging made it clear that they will soon be cutting rates. The ECB is very close to that same decision. We expect both central banks to cut rates in June. From the birth of QE, the Fed and European central banks have acted in tandem, meaning that US rate cuts are nearing.
This is from market watcher Bryan Rich who has become one of our favorites over the last year;
“The major central banks of the world have coordinated closely throughout the crises of the past 15 years. They all went to ultra-easy emergency level policies in response to the pandemic, and now all (exception Japan) have interest rates set ABOVE the rate of inflation (restrictive territory).
And we should want them to all be cutting rates, in coordination, mostly to ensure that global liquidity doesn’t become too tight, and (related) that their respective government bond yields (borrowing rates) don’t run away (higher).
With that, the Bank of England meets this Thursday. Both the Bank of England and the European Central Bank are telegraphing the beginning of rate cuts in June. That’s driving UK stocks back to new record highs. German stocks are less than one percent away from new record highs. And we should expect the U.S. central bank and U.S. stocks to follow.”
VRA Bottom Line: Our forecast from January is unchanged; the Fed will cut rates 2–3 times in 2024. The lag effects from the Feds 11 rate hikes have started showing up in the data.
It’s been a while since I’ve written this: “Don’t Fight the Tape, Don’t Fight the Fed”. If you’re not long, you’re wrong.
Our most important relative strength chart; the semis continue to lead the market higher.
From the end of the bear market (10/13/22), as seen below, the semis have led the S&P 500 higher. Textbook bull market action, as the semis lead, in both directions. We recently added to our position in the semis with this in mind, as this chart bounced off of the 100 dma, which has served as a near-perfect entry point each time that its occurred. This signal is both bullish for the broad market and for the semis.
Precious Metals and Miners: Next Leg of Bull Market Begins
Since first recommending gold/silver and the miners in my 2nd ever VRA Letter in 2003, the relative strength chart of “GDX to Gold” has served as our strongest buy/sell signal for the group.
As seen below, the miners have been leading gold higher from the end of February. This is a full-on buy signal for the group.
From the end of February, GDX is up 35%
VRA Bottom Line: Both GDX and Gold recently pulled back to the 21 ema, where they rallied immediately. This is one of our favorite technical set-ups, in sectors/stocks that have gone parabolic. Buying after tests of the 21 ema works. Excellent entry points. This is the bull market of bull markets for this group…they’re already sniffing out the next round of QE, rate cuts and a falling US dollar.
Pounding the Table on Energy Stocks
Energy stocks should be owned aggressively here. The global economy is accelerating, where surging demand will continue to be a macro positive for energy prices. We also see it in “Dr. Copper”, at two-year highs. Combined with the economic recovery taking place in China, India and throughout Europe, we want to keep buying energy stocks.
XLE (Energy ETF); Chart Points to Much Higher Prices
XLE (the non-leveraged energy ETF, for charting purposes) has been hot all year. Having recently pulled back to the 50dma, while also having worked off its extreme overbought readings on the VRA Investing System, we like this fundamental and technical setup here. Buy this dip.
Lastly for today: Our base case of the last 20 months remains firmly intact
- We’ve entered a structural bull market, powered by our 5 “Big Bribe” megatrends, featuring an “Innovation Revolution” and accompanying surging corporate earnings into 2030 +
- This bull market will ultimately rival the 1995–2000 melt-up as the most electric bull market in US history.
- The largest US tech companies are reinvesting $100 billion in their own businesses. Never bet against a bull market (or US economy) when there’s a major upgrade cycle in tech.
- We remain unconcerned about a potential rise in interest rates. Instead, we continue to look for 2–3 rate cuts this year, our forecast from the start of 2024. “Gravity”, featuring global demand for higher US rates, will do the rest.
- A key ingredient of the “Fourth Industrial Revolution” is that innovation/disruption will bring powerful disinflationary forces with it.
- Our wild card, a very friendly Fed into the November elections, will likely result in the economy and markets being “goosed” higher.
VRA Final Thoughts; The innovation revolution is only in its infancy. “Buy the dip” will remain the smartest of smart money strategies. This has been our message from the 10/13/22 bear market lows when we called the bottom and forecast that we were in the Roaring 2020’s. This is a generational bull market, driven by consumers and companies in their strongest financial shape in decades. Rising earnings and GDP growth will power the markets higher for years to come. Pullbacks should be treated as gifts.
Until next time, thanks again for reading…
Kip
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