VRA Investment Update: Follow the Semis & Buy The Dip. Economic Acceleration; The Trump Economic Miracle

Good Thursday morning all. Breaking: Treasury yields lost momentum this AM, with stock markets reversing higher, after the Labor Department reported that initial jobless claims rose to 211K last week, up from 190K the week before and more than the 195K forecast by analysts. The 10-year yield sits at 3.96%, after trading above 4% before the data. The data indicates the labor market may be weakening (due to higher interest rates).

VRA Market Update

Following Tuesday's ugly day of trading, brought on by another series of flip-flops from the Fed’s J Powell, the money printing rock star himself, yesterday's trading looked ready to put in a repeat performance, with sharp losses across the board immediately after the open. But then, at 11:25 AM, the semis (SMH) went green (taking most of the market with them) and by the close finished with solid gains of 2.5% (we own SOXL, the 3 x Semi ETF, which finished up 8%). There is no more important market tell than the semis. We see it here in the chart of SMH from the 10/13 capitulation lows…which also marked the bear market bottom.

SMH is up a big 44% from 10/13 with our SOXL up an even larger 150% from those same lows.

When the semis are leading higher, the rest of the market is (highly) likely to follow.

As we’ve been reporting, we appear to be witnessing economic acceleration. 8/12 VRA Investing System Screens are bullish and it’s likely we’ll be at 9/12 “soon”. And economic data to start 2023 has been stronger than many/most expected, including me.

Consider;

In February, S&P Global’s ‘index of services’ businesses rose to 50.5, pushing it back into expansion territory and marking the strongest reading in eight months (readings above 50 mark expansion). As we’ve seen often from the great Ed Hyman at Evercore (likely the best economist on Wall Street for 50 years) leading US CFO’s are reporting still solid growth expectations with broad optimism over the short term.

The other key area of economic strength is the one we point to often; the US jobs market. Hiring accelerated in January with payrolls surging by 517,000, the largest payroll gain since July 2022, which pushed average job growth over the last three months to 356,000, well above the 163,000 per month added before “rona insanity”.

Then of course the biggie. The real shocker. The US unemployment rate fell to 3.4%, a 53-year low. What recession?

And what happens if economic strength translates to corporate earnings growth, and earnings throughout 2023 surprise strongly to the upside? That’s where this bull market move higher gets interesting…

The Trump Economic Miracle; Still Intact 

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 is the reason why; low taxes, America-first, anti-China (Chinese tariffs remain in place), sweeping deregulation…all still broadly intact. Team Biden has (largely) left each of Trumps primary tenets to economic growth 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

What makes this textbook reversal higher even better, in our view, is that investor sentiment is once again hitting “heavily bearish” levels (contrarian buy signal). AKA, ff we’re right, the permabears (list builders) are about to go back into hibernation just as seasonal inflows begin their strongest period of the year (EPFR data):

And the biggie from last Thursday, the S&P 500 had an “outside day” yesterday, where SPX took out the previous days highs and lows (bullish engulfing pattern), a fairly rare but incredibly bullish buy signal. High probability.
And as a reminder, this is exactly what happened on the 10/13 capitulation lows. The bear market bottom.

Our views are unchanged, from the 10/13 capitulation lows; stocks have bottomed and interest rates, inflation and the US dollar have peaked. We have entered a new bull market, following 3 bear markets in 4 years (unprecedented) that saw the average stock lose >50% of its value in each bear market. Again, unprecedented. The end result is one of the most pessimistic periods in history for investors (a contrarians dream). And, while we entirely understand this pessimism, it’s also served to give us one of the best bull market set-ups of my career; “bull markets love climbing a wall of worry”.

We continue to see numerous/overwhelming buy signals:

-Semis/tech/housing leading

-key indexes/sectors remain above their 200 dma, with golden cross buy signals that have popped up everywhere 

-multiple bullish thrust momentum events

-market internals have continued to improve (with the exception of the last 2 weeks of February, which are seasonally weak).

- All while bears have outnumbered bulls for 44 straight weeks at one point in the AAII Survey (a record) and institutional investors equity exposure in bottom 30% historically.

- Broadly speaking, Investor risk appetite sits near its lowest level in 22 years. Crashes and bear markets do not happen when funds and retail investors are this bearish.

The macro points listed above have served as our primary investment theme “we’re in a new bull market” over the last 3.5 months. It has served us well.

VRA Bottom Line: With economic data to date suggesting the labor market remains hot despite the Fed’s aggressive tightening over the past year (thanks again to the Trump Economic Miracle), investors are hyper-focused on tomorrow’s jobs report. The reading is expected to show payrolls increased by 205,000 in February, after January’s blowout 517,000 figure. Again, 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.

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 we believe is happening now.

Until next time, thanks again for reading.

Kip

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