VRA Investment Update: Preparing for A Sharp Move Higher. Why the 200 Day Moving Average Matters So Much
/Good Thursday afternoon all. The markets look to be setting up for a catapult move higher into year end.
The technicals are forming around the 200 dma (after a near parabolic move higher post the 10/13 capitulation into heavily overbought readings), in what looks to me to be a classic consolidation pattern in advance of both the santa claus rally and January effect bullish time frames.
Why the 200 Day Moving Average Matters So Much
The 200 dma (we use SMA, or simple moving average), which covers roughly 40 weeks of trading, is commonly used in trading to determine the overall/general market trend. As long as a stock /index price remains above the 200 dma, the stock/index is generally considered to be in an overall uptrend (or downtrend, if below). The 200 day moving average also plays a crucial role in the VRA Investing System, although admittedly it’s been a horrible single piece of data to rely from late December 2018, where we’ve had 3 bear markets in 4 years. Had we waited to start buying again until our leading market indexes were back above their 200 dma we would have consistently missed out on significant investing gains.
Still, over my career, when investing, I feel much more confident putting new money to work once the intended investment is back above its 200 dma (and for 7 trading days).
After reading multiple studies over the years as to why the 200 dma matters so much, I’ve come to believe that it’s something of a self-fulfilling prophecy. The markets react strongly in relation to the 200 dma because so many investors, traders and analysts attach so much importance to it. And today, with algorithms and computerized trading on the rise, increasingly our daily trading is tied to moving averages and other technical events. BTW, the 50 dma and 100 dma are also important to follow, but without question its the 200 dma that matters most.
THIS is Why the 200 Day REALLY Matters
Longtime VRA readers know our affinity for analytics. This particular piece of statistical analysis about the 200 dma jumps off the pages. Going back to 1956, after trading below the 200 dma for 7 months and then recapturing the 200 dma (which just happened), the S&P 500 has gone on a serious bull market run with sharp gains over the next one to twelve months.
Of note, after breaking back above its 200 dma, the S&P 500 has had an avg move higher of 12.2% over the next 6 months and 18.8% higher over the next 12 months (with the S&P 500 higher in 92.3% of both cases). Just another reason to be long this market.
Golden Crosses; Advance Heads Up For These High Probability Buy Signals
Final point on using the 200 dma. We love it when a stock/index is putting in a “golden cross” buy signal. When the 50 dma crosses the 200 dma (with both higher), this is referred to as a “golden cross”. Golden crosses are high probability buy signals that consistently lead to above average gains.
Today, while we need continued positive action in the majority of our market indexes to begin flashing a golden cross buy signal, we are seeing the first stage of this process being completed, with both the 50 dma and 100 dma turning up across the board (literally).
Housing; Leading the Markets Higher
Here’s a final example of moving averages/golden crosses and performance that might surprise you. While the news has been nothing but horrible about the housing market, HGX (Housing Index) has actually been leading the market higher. From the June lows, HGX has put in a bottom and series of higher lows and higher highs. HGX up a big 26% over this 6-month time frame. Tremendous technical action. We also see that both the 50 dma and 100 dma have turned higher, with the 50 dma now just 4% below the 200 dma. Should housing stocks continue to ramp higher, HGX will be one of our first leading sectors to put in a golden cross buy signal.
Final point on housing; in the VRA Investing System, housing is our most important leading economic indicator. As we covered in our new book The Big Bribe, housing is in a long term bull market and should continue to propel the economy and markets higher.
The Fed NEVER Leads, They ONLY Follow. The 10 Year is Screaming “Pivot”.
Call me a conspiracy theorist (compliment) but this week’s (coordinated) actions from the CEO’s of JP Morgan and Goldman Sachs, warning of their concerns about a recession, felt like the perfect cover for J Powell and his Fed friends in advance of next weeks FOMC meeting and presser (Tue/Wed).
Powell now has cover to say something like “it looks like our work (rate hikes) is bearing fruit, as it appears the US economy is slowing down (but we must remain vigilant, blah blah blah…)
Know this: if Powell says anything close to what I’ve just laid out, the stock market SCREAMS higher next week and into year end.
Market watcher Bryan Rich was out with comments this week that line up exactly with my thoughts about the Fed pivot. The Fed “always” follows…they “never” lead and the 10-year yield is screaming “pivot”.
Rich also makes a great point about the markets; going back to 1954, once the Fed stops hiking stocks jump 14% over the next 12 months.
“Stocks are down 4% from that point, and have now fully retraced the rise that was attributed to Jerome Powell’s (relatively) dovish statements at his Brookings Institution discussion last Wednesday.
Importantly, what hasn’t retraced? Yields.
The yield on the 10-year Treasury closed at 3.52% today. That’s 30 basis points lower than it was trading when Jerome Powell spoke last Wednesday.
This behavior of the world’s benchmark interest rate (the 10-year yield) continues to send a signal.
As we discussed last week, it may be signaling an over-restrictive Fed (already), which will translate into falling prices (deflation) in the coming months, perhaps starting to show as soon as next week’s November inflation report. We will see.
By the way, Bank of America has taken a look at the past thirteen Fed hiking cycles. Dating back to 1954, when the Fed stops hiking, stocks rise, on average, 14% over the following twelve months.”
The 10 Year Yield is Screaming “Fed Pivot”
Again, the Fed only follows…they never lead. I believe we see the future for the Fed clearly in the chart below. On 10/21, as we pointed out at the time, the 10 year put in a significant technical reversal pattern, signaling that the highs for rates (and the lows in bonds) were likely in place. This is when I told you it was a good time to lock in your adjustable rate mortgages.
So far, so good, as yields have fallen from 4.33% to this today’s 3.48%. Folks, that's a collapse of 19%+ in just 6 weeks. Get ready for a Fed pivot. If not, Powell may just want another Christmas Eve stock market crash, like he caused in December of 2018 (not my view). And yes, those arrows below point to where I see rates going…a one way ticket lower.
The Latest From Ed Hyman, Evercore Economist and Best on the Street for Almost 50 Years
Hyman has increasingly become negative towards the aggressive tightening actions by Powell and his money printing brethren at the Fed. It’s rumored that Powell reads Hyman's work daily, so this should matter. Below, Hyman points out that real M2 money supply is in extreme contraction, meaning that liquidity in the system (for consumers) is hitting readings that should greatly trouble the Fed. One would hope that a comparison to the 1930’s would get Powells attention. I repeat; my forecast is that Powell will make a meaningful pivot next Wednesday (through Fed statement and presser). Warnings like this from Hyman should help.
Bottom Line: The VRA Big Picture
Our thoughts on the markets remain unchanged from the 10/13 capitulation, one of the most textbook cases of capitulation in my career; It’s increasingly likely that the bear market is over and a new bull market has begun, just as inflation, interest rates and the US dollar have all peaked. Highly bullish and highly risk on. And talk about a great looking wall of worry that’s in place (which bull markets love to climb).
Most importantly, and as we’ve been focused here for the last couple of months, 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). Again, hugely bullish for 2023.
My Interview with Wayne Allyn Root (WAR)
Finally for today. thanks again to our great friend Wayne Allyn Root for having me on his radio/tv show this week. Just minutes before my segment the news broke that Deep State FBI insider Jim Baker was caught red-handed by Elon Musk attempting to rig the Twitter Files (the Hunter Biden laptop cover-up), after also playing a leading role in setting up General Flynn, then leading classified files during the Trump Administration (as he spied on Trump) and then while General Counsel at Twitter, playing THE leading role in blocking the Hunter Biden story from getting out on Twitter along with banning untold thousands of Twitter accounts.
We don’t have Dems and Republicans. Haven’t for a long time. We have the Deep State (intelligence community, CIA, FBI, DOJ)…which owns the Uniparty…and we have Patriots. It’s literally America-loving citizens versus the Deep State. While we talked the economy and markets last night, just wanted you to know what was on my mind as the interview was taking place. We’ve got some serious house cleaning to do in this country. Thanks again Wayne.
https://frankspeech.com/shows/wayne-allyn-root-raw-unfiltered
Until next time, thanks again for reading….
Kip
Join us for two free weeks at VRAInsider.com
Please join us each day after the market closes for our Daily VRA Investing Podcast!
Sign up for email alerts @ vrainsider.com/podcast
Also, Find us on Truth Social and Rumble
