VRA Investment Update: New Highs Beget New Highs. The Markets Lead, The Fed Follows. Semis (Still) On Fire.
/Good Thursday morning. As our resident Fed watcher covered on his podcast yesterday after the close, J Powell’s presser contained a lot of words, but should serious investors even continue to listen to him?
After 5 major policy errors since he got the job (from Trump) in 2018, Powell and team have been (exactly) wrong far more than they’ve been right.
Last week it was our view that Friday’s jobs data was an outlier and that powerful disinflationary forces would continue to propel the markets and economy higher. This week’s CPI & PPI reports (should) put the nail in the coffin of inflationary fearmongers.
I decided long ago that instead of listening to the Fed, I prefer to read the tea leaves…AKA, the bond and stock market action. They lead, the Fed follows.
We’ve been hyper-focused on this chart in particular, that of 10 year yields and the technical breakdown below this all-important trend line, which is now serving as resistance. Chart perfection, should it hold (it will). Next up, rates will continue to move lower…as the markets build in at least 2–3 rate cuts in 2024 (our forecast all year).
As we’ve covered over the last several months, surely the Fed sees that the two problem areas for inflation had remained rent/shelter and insurance costs, both of which are (big-time) lagging indicators. Market strategist Bryan Rich (excellent work) made this point in graph form better than I’ve seen it anywhere else. Folks, the Fed’s job is DONE.
To those that continue to tilt at the windmill of “inflation is killing us”, the facts tell a (much) different story, as the great Ed Hyman pointed out this week when he wrote that consumer net worth has already grown (at least) 10% in 2024. There’s a reason the markets are skyrocketing…new ATH’s again in S&P 500 and Nasdaq yesterday…even as the Fed has refused to cut the FFR from 5.33% and as inflation had appeared to remain sticky.
As the best discounting mechanisms on the planet, the markets are forecasting the future…and it’s a future with continued and dramatic stock market gains and extraordinary levels of wealth creation. We are in fact in the Roaring 2020’s. There’s rarely (if ever) been a better time to be a smart money, informed optimist.
Final Notes From The Fed
I’ll give Powell this; he recognizes that the economy is fundamentally strong and that rates may well stay higher for longer, because of that fact.
As a reminder, during the dot-com melt-up, the 10 year yield “averaged” better than 6%, with bouts over 7%. The 10 yr is 4.25% this AM (and headed lower). BTW, my first mortgage was near 11%…it’s just what we did.
At the end of the day, this bull market is a freight train…and we’re only in the early innings (inning).
The Most Important Chart of this Bull Market?
Another ATH in the semis (SPX and Nasdaq too). Beginning on 10/14/22, we began pounding the table on the Semiconductors SMH (Semi ETF), which is now up over 200% from the October lows.
Our leveraged ETF position has given us gains of 450%, however the group is beginning to hit extreme overbought levels. We’ll advise when it’s safe to start putting new money to work in the semis. (Join us at VRAletter.com to learn more)
As we cover often, from the birth of QE there’s not been a better market tell than the action in the semis. They have consistently moved the markets, in both directions.
Below is one of our favorite charts from the bear market lows of 10/13/22, the relative strength chart of the Semis (SMH) to S&P 500.
In addition to the semis leading the world’s largest and most important equity index higher over the last 20 months, we have a near perfect bullish channel. This is the exact chart that we’ve used to time our “buy the dip” purchases for the semis/tech, as well as the broad markets.
Each time this channel has been challenged to the lower trend line, its represented a phenomenal buying opportunity for both the semis/tech and the broad markets (or inversely, a near term top). As we can see, we’re getting closer to the top end of this all-important channel, but it still has room to run. And we’re light-years away from being in danger of seeing this channel breaking down. We’ve considered this chart as our “VRA secret sauce” for major market timing signals and because repeating patterns matter a great deal, until and unless this chart deviates we will continue to use and rely on it.
Keep in mind, the group is beginning to hit extreme overbought levels. We’ll advise when it’s safe to start putting new money to work in the semis. (Join us at VRAletter.com to learn more)
Until next time, thanks again for reading…
Kip
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