VRA Investment Update: The US Economy is Accelerating (thanks #45). Investor Sentiment is Heavily Bearish…and Why That's Bullish.
/Good Thursday morning all. This morning we learned that weekly jobless claims came in at just 190,000, another incredibly low reading which backs up a series of economic data from the last 1–2 months that show the economy is actually accelerating, rather than slowing down. When you also have the lowest unemployment rate in 53 years and quarterly GDP growth of 2.8%, it helps to make sense of the 10-year yield rising to 4.07% this AM.
If you listened to Tyler’s podcast yesterday then you’ll understand why the Fed is not to be trusted and why the bond market is doing what it’s doing. The evidence is clear and overwhelming.
Many are surprised, even shocked why this economic growth, with a common refrain of “the data is not to be trusted…there’s no way the economy is growing under this administration.” It’s not that I don’t get the point. It’s just that I believe we know why the US economy is on solid footing; The Trump Economic Miracle remains largely intact; low taxes, America-first, anti-China, sweeping deregulation…all still broadly intact.
Trump told us his America-first polices would power the US economy for a decade +. People can doubt Trump on a number of things…just not on his economic policies. #MAGA
Now, with the most bearish two weeks of the year out of the way, we’ve entered two of the most bullish months of the year (March/April) in the most bullish year, period (3rd year of presidential cycle). As you’ve heard me say from the 10/13 lows, ‘having been on the wrong side of the birth of a new bull market, its an experience I remember well…and it’s not pleasant”. The bears can’t believe whats happening and “just know” that the next shoe is about to drop, crashing the market in the process.
But bull markets love climbing a wall of worry…thats what I believe is happening now…and in the process they leave a trail of identifying markers.
We’re seeing these bull market markers now, each of which comprises important screens for the VRA Investing System.
1) Ugly opens are met by strong buying pressure. We’re seeing this play out regularly, from the 10/13 lows (although the last two weeks of Feb were not pretty).
2) The final hour of trading (the smart money hour) is consistently bullish. We’ve seen this play out regularly, from the 10/13 lows.
3) Key leadership groups/stocks rise on bad news. We’ve seen this play out on less than sterling Q4 earnings.
4) The market internals continually improve, even on bad days. As a reminder we had a rare “momentum breadth thrust” in mid-January. This technical buy signal has consistently marked the birth of a new bull market (back to 1950).
5) We see the markets strength below in the percentage of stocks trading above their 200 day moving average (dma), which after recently hitting a new 52 week high now sits at 57.8% but remains well below its 2-year highs of greater than 90%.
6) Golden cross buy signals start occurring everywhere, where the 50 dma crosses the 200 dma. Exactly the set up today, with key GCBS in the Dow Jones, S&P 500, Semis, small caps, financials, the S&P 500 and gold, silver and the miners (GDX). Remarkably strong technical buy signals, particularly at the birth of a new bull market.
7) And finally, one of our top buy signals remains in place. The semis (SMH) continue to lead the markets higher. When the semis are leading there is not bigger buy signal for the broad market.
The semis are the ultimate tell.
Here’s more evidence of our wall of worry. From CNBC this morning;
“Risk assets are under pressure again as the benchmark 10-year Treasury yield hits 4% for the first time in over three months on fears of sticky inflation and higher interest rates. Fed watchers are warning that Powell may resume his hawkish stance at this months Federal Reserve meeting. Analysts warn of another big ECB rate rise in May after core Eurozone inflation accelerates. Salesforce stock jumps after strong guidance but Tesla’s investor day leaves the market cold. The bank that services some of the U.S.’s biggest crypto exchanges warns it could collapse. Ukraine continues to ask for fighter jets and tanks, as the worlds largest nuclear superpower (Russia, not China), threatens their use.”
Without question, the risks are high…and we have investor sentiment polls that illustrate exactly that. The AAII Sentiment Poll (which I’ve voted in since the late 80’s) is incredibly bearish, with 44.8% bears to just 23.4% bulls. Contrarians know what this means.
We also learned yesterday that Investor’s Intelligence level of “Bulls” fell to 38.4%, the lowest readings this year. As one of our favorite long-time market watchers, Helene Meisler, likes to say; “nothing like price to change sentiment.”
VRA Bottom Line: Our views are unchanged from the 10/13 capitulation lows; the dollar, interest rates and inflation have all peaked and US stock markets have bottomed. We will continue to use pullbacks to add to VRA Portfolio positions.
And the historical data is some of the most powerful in my career.
One: History tells us that the worst years for stocks are followed by some of the very best years on record. As seen below, since 1950, following a 20% decline in the S&P 500 the market has been higher 100% of the time with an average gain of 27.1%. Again, the S&P 500 finished down 19.4% with Nasdaq down a stunning 33.1%.
Two: Importantly, and this remains the most powerful piece of analytics of my 37 year career; since 1952, from the midterm lows to 12 months later, the S&P 500 has had an average return of 32% with gains in every single midterm year (18 for 18). Bullish for 2023.
If, as we believe (and as evidence continues to stack up), inflation, rates and the US dollar have all peaked…as the Trump Economic Miracle continues to power the US economy higher (and as numerous European markets/sectors are hitting all time highs)…the resulting decline in rates over the coming weeks/months should power US equity markets to fresh all time highs as well.
With the wall of worry that’s built up (bull markets love climbing walls of worry), and with investors fearful and positioned bearishly, it wouldn’t take much good news to keep stocks headed higher, just as we’ve seen from the 10/13/22 capitulation lows. After all, the markets are forward looking and act as a discounting mechanism. We remain bullish and we are buyers of VRA Portfolio ETF’s and VRA growth stocks.
Interview with Wayne Root on Real Americas Voice.
Finally for today, thanks again for having me on your new show Wayne. If the emails and feedback are any idea, you have a large number of viewers.
Waynes new book is coming out on March 21st and Wayne has agreed to join the VRA for a podcast one week earlier. Wayne is everywhere…his shows are blowing up.
Couldn't happen to a better guy. Thanks again Wayne!
Until next time, thanks again for reading.
Kip
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