Good Wednesday morning all. Before we get the latest VRA System update, allow me to share some personal insights on where we are today in the intersection of politics and the investment markets. Some of what I will share here is “emotion” based…and we know exactly how terrible emotion based investing can be. For example, emotional investing was dead wrong about Brexit (after 2 days of heavy selling, the markets soared higher). Of course, emotional investing has been equally dead wrong about Trump winning, with an all out assault on 18 fresh market highs.
In each case…and there are many, many other examples we can point to out throughout history… investors that acted on the emotion of fear/greed, and that followed what the overwhelming majority “believed” would be the most likely move in the markets, turned out to stone cold, dead wrong. I have fallen into this trap many times over the years…and each time I feel like a freaking moron for having done so. Human nature can be a bitch to overcome…even when I am staring at my VRA System screens each and every bloody day.
My most recent (and painful) example of having missed by a country mile was Brexit. Within 36 hours of the vote to leave the UK, the VRA System was flashing 95% oversold in the broad markets (S&P 500, Dow Jones, Russell 2000). I should have been ALL OVER these readings, encouraging all VRA Subscribers to go 100% long bullish leveraged ETF’s.
But I did not. I missed it. And I suck for missing it. I apologized to you then and I apologize again today. Simply no excuse for falling into “fear mode” when I should have recommended aggressive action on the long side.
I made a promise to myself then that I would not make that mistake again. Let me add that the election of Trump was a bit different…the markets never reached anything close to the levels of oversold that we saw from Brexit…but the reaction has been nearly identical…the markets have soared higher (and I have been bullish on the markets since April).
It’s with this recent history of Kip missing one of the most obvious of situations (Brexit buy) that I present the following to you this morning. What we are seeing are extreme readings among highly interconnected investments. As you’ll see, the VRA System sees the potential for some dramatic reversals…reversals that could bring high levels of volatility and near immediate reversals in the following sectors:
1) S&P 500
As you can see below, the SPX is trading not only near record territory but is highly extended, trading at 2% above its 200 dma. May not sound like a lot, but for the worlds largest equity index, it’s a large premium. Selling pressures are building and the RSI has reached extreme levels. However, we have yet to turn down through either the 5 day ema or the 10 day dma, meaning that it is too soon to go short the SPX.
2) Russell 2000
With the R2K, we see a much different story from the SPX. The R2K is a full 16% above its 200 dma…very close to the largest premium of the past 10 years plus. Other measurements (RSI, MFI, MACD) confirm that this index has almost certainly run too far too fast. The R2K has also benefited greatly from a sharply rising USD (almost always bullish for small caps as they do most business in the US, versus large cap multinationals that depend far more on exports). The R2K, based on any/all available history that we can find, is ripe for a correction.
3) US Dollar
This is where I see things as being most interesting. The 10 year chart below of the USD is pretty remarkable. As of today, the USD is 7% above its 200 dma. Again, compared to the R2K, it may not sounds like much…but it is…big time. I can find just two instances over the last 10 years where the USD has been this extended, and that was in 2008 and 2010. As you can see, the dollar surpassed its 200 dma by even larger margins…hitting as much as 13-15% above its 200 dma.
But its the action that followed these premiums that concern us today. Shortly after reaching these extremes, the USD began to reverse course. The most interestingly parallel was the 2010 rise was then met with a plummeting USD, reaching losses of 15% in less than 3 months.
Today, everyone is a dollar bull. Emotional investing…potentially at its worst.
4) GDX (miner ETF)
As we know well, precious metals/miners have traded in the exact opposite direction of the USD. But folks, this pendulum looks to have swung much to far. GDX is now 24% under its 200 dma, a level that I can find exceeded just 1-2 times (during the 2013 sell-off of sell-offs, as the manipulators crushed PM’s).
Before the mini-rally that took place yesterday, GDX had reached 92% oversold…extreme oversold levels. Should the USD begin to reverse, the snap back move higher in PMs and the miners will be fierce. The smart money is using this correction to buy up cheap gold/silver/mining stocks.
In summation, yes…we will almost certainly hit 20k on the Dow. But what then??
The VRA System…being 100% emotion free…says that its likely time for reversals in each of the above sectors. Most specifically in the USD, R2K and GDX/PM’s.
And remember this; once a major bogey like Dow 20k is reached, past high profile bogeys have then resulted in sharp and dramatic reversals…if only for a few days to a couple of weeks. I remain long term bullish on the market…but its time for some imbalances to correct.
Finally for this morning, I continue to collect data on our end of year/seasonal trades. Once the VRA System has clear readings on our specific targets I will begin to get that info out to you. For my money, the coming spike higher in the miners are a great possibility. In addition, should the VIX (volatility ETF) continue to flash “buy”, we could be taking action here as well. Ignoring emotion…acting on VRA signals.
Until next time, thanks again for reading…