VRA Investment Update: Semis and Housing, VRA Leading Indicators. New Bull Market; Repeating Pattern.

Good Thursday morning all. From the 10/13 capitulation lows it’s been our view that the equity markets have bottomed and that rates, the US dollar and inflation have all peaked. The action in semis/tech and housing have solidified our views. 

When the most important market/economic elements of the VRA Investing System are leading the markets higher, this serves as a discounting mechanism that tells us “the coast is clear” for higher equity prices.

In the face of widespread permabears and with the vast majority of investors in the “extreme bearish” camp, our view has remained that the US consumer has been remarkably healthy and that corporate America has rarely been in better shape, with debt/equity levels at all-time lows. And, when it comes to the housing market…our #1 leading economic indicator…it became clear that home prices could not continue to grow by 20-30%/year, nor could rents continue to increase at astronomical levels. The Fed’s rate hikes have served to cool both markets, a healthy development. 

At the end of the day, when the unemployment rate sits at 53 year lows and as homeowners net equity and credit scores remain right at all-time highs, we never bought into the “here comes a hard recession” mindset (although we wouldn’t be surprised to see a mild recession at the beginning of 2024). 

VRA Bottom Line: 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”. 

Following 3 bear markets in 4 yrs (where the average stock fell >50% each time) and from the 10/13 capitulation lows we’ve seen numerous/overwhelming buy signals:
-Semis/tech/housing leading

-key indexes sectors >200 dma with golden cross buy signals popping up everywhere 

-multiple bullish thrust momentum events

-market internals continue to improve, now with 76% of the S&P 500 >200 dma

- All while bears have outnumbered bulls for 22 straight weeks in AAII Survey (a record) and institutional investors equity exposure in bottom 30% historically.

- Investor risk appetite is at its lowest level in 22 years. Crashes and bear markets do not happen when funds and investors are this bearish (and its barely better for institutional investors)

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. 

Tyler covered this topic in detail on his podcasts this week. We expect overbought pullbacks to be short-lived. We will continue to use these pullbacks to add to VRA Portfolio positions. 

The trading pattern that has been developing, from the 10/13 lows, appears to be a high probability and predictable repeating pattern. Rinse and repeat…

Latest From The Fed

Markets have been choppy as investors weighed comments from Fed Chair J Powell on Tuesday as to how long it might take to tame inflation. The markets have been discounting the Fed and J Powell from those October lows, knowing that lower rates and ultimately more QE lie ahead.

Powell said that "2023 should be a year of significant declines in inflation and it’s clear that disinflation is now well underway”. Each time Powell uttered the word “disinflation” the markets rallied higher. We believe that investors should get used to this theme (disinflation), as the US economy is clearly slowing and further aggressive rate hikes from here would work to crush both the economy and US/global markets. 

His comments echoed last Wednesday’s presser and renewed investor hopes for less aggressive monetary policy, even after the strong jobs report from last Friday. "We didn't expect it to be this strong," Powell said at the Economic Club of Washington, but it "shows why we think this will be a process that takes quite a bit of time.” With the 10-year yield at 3.66% and the Fed funds rate at 4.75%, the markets are speaking clearly. They are calling BS on J Powell. The Fed never leads…they only follow. 

Our view remains that “this is the pause that refreshes” referencing our alerts last week that US markets had reached extreme overbought readings that typically result in a short term pause.

Powerful Analytics Point to 2023 as a Boom Year

January ended up with better than 5% gains in S&P 500. We already knew that the Santa Claus rally and first 5 days of January were up, so in order to get the Bullish Trifecta” from the analytical work from the Stock Traders Almanac (the great Yale Hirsch, the father of Wall St analytics) all that was left was to see January came in as a positive month. Throw in the fact that last year was negative and it gets even better. 

You have to look hard to find analytics more bullish than below. 

Since 1950:

1) If you have a down year plus a positive Santa rally, plus a positive first five trading days, then in that case the market (S&P 500) has been up an average 21% and the frequency of gains is 92%.  If you add the third level, with the market positive in January, the market has been up 29.1% and with gains 100% of the time. 

2) And there’s an even better chance for a strong return when the S&P 500 is up more than 5% in January (we’re right there now), following a negative year. This combination has only occurred five times and the S&P 500 has been higher on the year all five times with an average gain of 30%. The last occurrence was 2019 when the January gain was 7.9% and the return for the year was 28.9%.

3) Finally, we’re in the pre-presidential election year, which is the most bullish year of the presidential cycle. This indicator points to gains in the 24% area for 2023.

While at these overbought levels on the VRA Investing System we use patience on adding to positions in our our ETF’s while we continue to use monthly dollar cost averaging on our VRA 10-Baggers. We expect any market weakness to be short-lived. We are buyers on dips. This has the markings of a big year for the US and global stock markets. 30% + in US. 

Until next time, thanks again for reading.

Kip

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