Let’s get this out of the way, right away; US markets are now trading at 98% overbought (based on VRA Momentum Indicators). This is most typically when bad things happen to stock markets…but folks, this market has proven the shorts wrong time and again…and we know why:
1) Central bank easy money…manipulation…forcing stocks higher
2) Negative interest rates (globally) have resulted in huge fund flows into the “positive rate” US…from Europe and Japan (and from China, where investors just wanted out of their own system).
3) And the story we’ve been telling for many, many months…share buybacks and M&A activity…both at record levels.
The share repurchase story got even bigger this week, as we learned that in just the S&P 500, companies bought back $161 billion in the first quarter…and have authorized $357 billion in buybacks through June.
Still, the VRA System would not allow me to recommend a major US equity index…be it the Dow, S&P 500, Nasdaq or Russell 2000…because each is trading at 97% overbought (or higher).
Rarely do we see this…and rarely does it not result in, at minimum, a decent sized pullback. But…as we know…central banks have a LOT of firepower. And boy oh boy, have they shown the world that they intend to use anything and everything at their disposal.
When you hear people say ‘Don’t fight the FED”…this exact scenario is what they had in mind.
Don’t Fight the Tape
I’ve written about this 2-3 times over the past month…but it’s significant enough to include it here, again.
Now that the market has hit a new high…after not doing so for over a year…research tells us something very interesting about what happens next:
The 21 other times in history that the S&P 500 closed at its first 52-week high in at least a year, including the times the index fell into bear market territory in between, the market was higher three months later 95% of the time, by an average of 11%, and higher a year later 95% of the time, by an average of 22%, according to data provided by MKM Partners and Krinsky.
The four previous times the S&P 500 made its first 52-week high in at least a year, without an intervening bear market—February 1995, November 1984, January 1961 and March 1954—the index was higher after three months each time, by an average of about 8%, and higher a year later each time, by an average of 28%, according to MKM data.
As they say, history doesn’t always repeat…but it often rhymes.
I was also taught…as a young stockbroker by one of the legends in the business (his mentor was on Wall St during the ‘29 crash)…that the market anticipates 6 months out. Right now, the market is telling us that things “will” be better, in 6 months time…maybe a great deal better.
In part, I believe the markets are telling us that regardless who wins, Trump or Clinton(s), the US economy will improve…and that earnings have likely ended their 5 consectutive quarters of an earnings recession.
BTW, if it feels like we are being whipsawed by this insane market, it’s because WE ARE. But through it all, one thing has held up…the markets internals have been very, very solid. That’s the biggest stock market “tell” that I know….
We will stay nimble…and we will stay heavily invested in PM’s and specific mining companies that will profit most from rapdily rising inflationary pressures, as we saw this morning in the Producer Price Index (which ran semi-hot in June at .5%). I have also warmed up a great deal to emerging markets…a number of painful bear markets globally have seen their lows, in my view.
The risks to the market…heck, the risks to the world…seem to be ever present and growing. We will keep our eye on the prize…as we continue to “bash Mr. Markets head in”.
(We have some massive gains this year, with profits of more than 1200% in just two VRA Core Portfolio holdings).
Until next time, thanks again for reading…