Podcast

VRA Investing Podcast: Market Rotation And What It Means For Investors – Tyler Herriage – June 20, 2024

In today's episode, Tyler covers the rotational themes of this market and the VRA's strategy during an overbought market. With exciting catalysts on the horizon, including end-of-quarter fund flows and historically strong July per ...

Posted On June 20, 2024Episode 1408
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About This Episode

In today's episode, Tyler covers the rotational themes of this market and the VRA's strategy during an overbought market. With exciting catalysts on the horizon, including end-of-quarter fund flows and historically strong July performance, it's a period ripe with opportunities. Tune into today's VRA Investing Podcast to learn more.

Transcript

Dont look back because the market is closed. Good Thursday afternoon, everyone. Tyler Herriage here with you for todays VRA investing podcast. Hope you all had a great day out there today. Great day back, I should say, after the market was closed yesterday for juneteenth. So for anybody who had yesterday off, hope you had a great little midweek holiday there. But we’re back in the saddle here today. And to start off here, we came into this week with eleven out of twelve VRA investing screens bullish.

And we remain at that level here today, which is a record high. And speaking of record highs, we saw more of those again here today. Unfortunately, our major indexes weren’t able, at least not across the board able to hold on to those gains today. But both the Nasdaq and the S&P hit an all time high earlier in the session today. But I’ll point out here, as we’ve been saying for the last couple of weeks, we are now getting even more so heavily overbought conditions from the, from the tech sector and from the semiconductor sector as well here. The semis were down bigger on the day today. And really, we’re just one indicator short here of being extreme overbought on steroids, which does not change our view overall on this roaring bull market that we still see as in its early innings here. You know, we’d like to compare this period a lot to 1995, to 2000, when the Nasdaq rallied 575%.

[00:01:50]:
We would say that today we’re still in the 1995 range here. There’s even, you know, some stats you can look at in comparing those time periods where an argument could certainly be made that this is even before that. This, we’re still in 1994, right. Pretty good timing here. 30 years later, we’ll see if we’re on the same kind of track here. We vary well, could be in that kind of a roaring bull market here. But again, kind of back to these overbought conditions. Again, not something that we look at as a drastic Vra sell signal here, especially when you’re hitting all time highs.

Right. And the semis did so this morning as well before pulling back. But what it does do for us here is it causes us to pause our short term, excuse me, we pause our regular monthly dollar cost averaging programs. I want to make sure I said that correctly because we are big advocates here for monthly dollar cost averaging into your favorite names, favorite sectors, our VRA timbagger positions here, as well as our leverage ETF’s. We like that strategy for most of our trades. If we don’t like it for a trade. We’d alert you to that as well. But big believers in monthly dollar cost averaging.

And when you get to these levels, when you’re at extreme overbought, again, not always a massive sell signal. We’ll alert you to that as well when we start to see those sell signals. But it is a time to take a little bit of caution and pause those strategies here for a little bit. Again, just a pause over the medium to long term, we could not be more bullish on this market, as you’ve heard me describe already in some detail on this podcast. But in the shorter term, again, hitting or getting close to extreme overbought levels for tech. However, I’m going to go back to a theme here. We’ve been talking about a lot, really, for this year and in the short term here, well, first off, again, kind of back to the overbought readings. Kip pointed wrote this up this morning, and I think that it deserves to be said on a podcast as well.

[00:04:06]:
Perfectly encapsulates how we feel about overbought conditions, because there is no hard and fast rule in the market that says, oh, you’ve hit extreme overbought levels here. Now it’s a sell off. There’s no rule for that. In fact, a market that gets overbought and stays at those extreme overbought levels is a very bullish sign as well. That’s when you get the parabolic move higher, right? That you don’t want to miss out on. That can be the largest move of a multi month move is when it goes parabolic towards the end of a move. If we saw a move like that, or if this was a move like that, we think it’s a short term top. Before we get back, you know, take a little pause and get back to all time highs.

Again, not saying we’re there right now, but that’s how we’re treating this environment. Any pullbacks that we get will continue to buy the dip. We’ve seen that as the smart money move from the October 13, 2022 lows. We remain with that view right now that, by the dip, is the smart money play. But kind of back to what brought this up is that our rotational theme here that we’ve talked about here often is continuing to play out here, you know, and so, just to give a little recap for our new listeners, we’ve seen, everyone’s talking about the magnificent seven, right? You know, Nvidia, Apple, meta, Google, those companies, the mega cap, tech companies, and they’re saying that’s the only reason our markets are higher right now. And in some instances, they may be right. We don’t have a problem with that, though. The generals are doing their job leading.

That’s fine with us. And when they get to these extreme overbought levels, then it is time for the rotation into other sectors, rotation from tech into value. And so that might be a little bit of what we’re seeing here today. With the Nasdaq finishing lower, the Dow, which is essentially compared to the Nasdaq, that’s the value index compared to the Nasdaq. Right. Finish close to the highs of the day to day, up three quarters of 1% in the transports, finished even better on the day to day. We also saw it in the energy sector, which has seen the least amount of fund flows of any of the other eleven sectors as of lately. Right.

[00:06:28]:
Hedge funds are starting to get positioned here longer, mostly in the tech side. So we had these unloved areas, the value Dow transports, gold miners, energy names, all leading the way higher today. It’s exactly the kind of rotation you want to see from a bull market. Trees don’t grow to the sky overnight. You’ve got to have your positives along the way. Again, part of a healthy bull market action over the long term. And another confirmation of our views that we want to stay long and strong here, even at overbought levels. Again, just pausing our monthly tolerance averaging buys.

In the shorter term, though, we do have some exciting catalysts right around the corner here. We began discussing these with our VRA community in the last week now, which is first and foremost front running of the end of a month and the beginning of a new quarter as well. So we talk about this at the end of every month, and especially at the end of every quarter, is that you get these fund flows from pension plans, retirement accounts. This is when those deposits into those accounts are now being allocated right at the beginning of a new month, at the beginning of a new quarter. And so, as the market has come to understand this, you get front running, naturally, of these kinds of moves, especially when in an environment like this, where wages are on the rise, people are putting more and more away as much as they can when they’re not having to spend more because of the inflationary environment that we’ve been in for the last couple of years. But we’re now just six trading days away from the end of June. I know this year has been flying by, but that means again here, new month fund flows coming in. And what we’re seeing right now is likely the smart money front running this kind of move here.

And it helps even more so that July has been an incredible month for investing for the last nine years now. You know, the old adage on Wall street is sell in May and go away. I’m not saying that that term has been used up, but it certainly hasn’t applied every year for the last ten years where we’ve had, you know, some good summers, some bad summers, and some phenomenal summers. Take a look at July. July has now been up nine years in a row. So nine out of the last ten years now, with average gains of 3.1%. And it is the best month of performance for the Nasdaq 100, which is the queues if you want the ETF, with gains of three and a half percent for tech, the Nasdaq 100. So, as we talk about here often, when tech leads, the rest of the market follows.

[00:09:30]:
We’d love to see a strong month of July again here for tech. But final point here about fund flows. Remember, we’re just barely off of all time highs in money market funds. That is just barely pulled back at all. They’re still over by some metrics. You see much higher numbers, but at least $6.2 trillion sitting on the sidelines, underperforming this market. Right. Even in a money market account, if you’re getting five to 6% in there, most people be pretty happy with that.

But when you see a market that seems to be running away like this. Right. We’re hitting all time high after all time high. We started the year in the Nasdaq, at the, in the 14,000 range, folks. We’re above 17,000 now. That’s a six month return of over 23%. Right. So, annualized a 46% gain on, on the year.

Now, we’ll see if that happens. But point being, what would you rather get? 23% over six months or that 5% over the course of a year? Right. So I think a lot of people with money in money market accounts, which aren’t a bad thing. I’m not trying to villainize, though, or demonize that in any way, but people are realizing I have too much money in these market accounts, in these money market accounts, and I’m missing out on these incredible gains from the innovation revolution. And that, folks, is fuel to the fire. It’s a beautiful thing that leads to the real demand and that leads to the animal spirits coming back into the market. When people cannot get out of their money market funds fast enough, cannot convert their retirement plans to invest the way they want fast enough to get their money into this market as aggressively as, as possible. And until we’re starting to see those kinds of moves, when people are panicking about the gains they missed out on, we’re nowhere near a market top here.

[00:11:33]:
I was going to talk about this in a little bit, but it ties in here perfectly. The fear and greed index, it moved lower on the day to day. Now our markets finished lower. Maybe makes a little bit of sense, but we’re at all time highs and in the range of all time highs almost across the board here. And the fear and greed index hit a 40 again today here. Again. That is another fear reading here. And so, as contrarians, we love to see that, just like with the energy sector, if it’s been the least loved with fund flows on the year so far, you know, we’re about to get a rotation, and especially when those big hedge funds have to take a little bit away from their tech positions and put it into energy as well, just like money market funds.

Liquidity. Liquidity. Liquidity for these sectors and our favorite names, if you can’t tell. We think we’re in a very exciting period right here. We didn’t see as much of the fear show up in the AAIII investor sentiment survey. Slight downtick in bulls on the week, but also a 3% drop in bears here as well. A lot of investors moving to the neutral side of things right now. Again at a 44% bullish.

Yes, more bulls out there. But until we’re at, you know, 55, 60, 65% sentiment bullish for weeks on end. Right? Not just one week or two weeks of it, but a month of it, two months of it. Those are the signs that we start to look for at the top. Also. Finally here to kind of wrap up what we expect to see in the new quarter, we’ll also get another round of new economic data. Now, the good news is we don’t have another Fed meeting for over a month, but it also means we’re not in the Fed blackout period. Also, at the beginning of a new quarter, we’ve got new earnings coming up.

[00:13:24]:
Hard to believe. It seems like we just wrapped up Q one earnings here, and we’re already getting into Q two. But during earnings periods, we’ve seen a lot of companies announcing share buybacks. Right. If you’re on a share buyback plan, you can continue to buy back your shares as part of that plan. Right. But for new share buybacks, there is a share buyback blackout period for two weeks leading up to earnings and I believe it’s like two or three sessions after earnings before you can start buying back shares again. So we are in the share buyback blackout period in what should be a cycle here that we’re seeing of companies buying back more and more of their shares.

So expect more announcements about that in the coming earnings. Again, more liquidity here. So that will be exciting to watch for. But again, for the Fed, they’ll be watching the new economic data coming out, you know, July. So we’ll get another round of inflation data, CPI, PPI, PCE, will get employment data back. And what we expect here is for all of these numbers to be in the Goldilocks range. We don’t like to predict too many individual reports here, especially, we’ve talked about this year often how much these reports can be manipulated and then revised lower, revised higher months later. Right.

Where those don’t even make revisions, don’t usually make big headlines. So you really have to pay attention to the data to know what’s going on. But while I’ll avoid predictions about what the data is going to be, but I think that whatever it is will be interpreted as Goldilocks for inflation. That means continued improvement, continued disinflation. We’re not quite to the deflationary side, but not so much improvement that the Fed will be expected to rush to cut rates. We don’t want the Fed to rush to cut rates, or at least not to seem like they’re rushing. We wanted to be telegraphed, controlled. You know, somebody just made a good point on Twitter earlier this week that the Fed did a mid cycle rate cut adjustment in 1995, where they did 75 basis points of cuts.

[00:15:41]:
1995. Right. So we had the next. It sparked, helped spark that real.com melt up kind of rally. That could be where we are today. We stand by two to three rate cuts in 2024, it likely will be about 75 basis points worth of cuts. So you’re looking really similar again here. Another comparison to the 1995 to 2000 area, then, for employment.

What does a Goldilocks number look like? Well, it’s not a negative jobs number. Not showing recessionary aspects. Right again, then the Fed’s got a panic to cut rates. The market, if anything, hates uncertainty more than anything, but also not so hot that the Fed can continue to pause in this cycle here. Right again, Goldilocks area there. And I’ll say this as a, as a bit of a clarification, we never root for a poor jobs number here. It’s not in our DNA to root against the american economy. So of never really understood the.

Oh, the economy’s too hot, too many jobs are being created. How is that ever a problem? That’s a whole lot of small minded people. That’s the biggest problem. Problem. Again, key word there that we have. We want to see rip roaring jobs numbers. That’s what we want to see. So again, next fed meeting, still over a month away, but with that kind of economic data coming back in droves, we’ll get a lot of fed speakers between now and then.

[00:17:14]:
And if we get those, those Goldilocks kind of numbers, we expect them to begin to roll back their hawkish tones that they’ve shown so much of in these, uh, press conferences that they do. They like to get real hawkish when they’re up there on stage by themselves, not at an FOMC event. But speaking of central banks, we got another rate cut here today from the Swiss National bank, really the front runner of this rate cut cycle. They were the first to cut rates now the first to cut a second time here as well. And as we talk about here often, the reason why I bring this up is that in the age of financial engineering, the central banks work in a coordinated fashion. So another sign here that this is what the Fed is following. Remember here, it makes perfect sense for this main reason that inflation began to show up in Europe before it showed up here in the US. If you want to go back further, it showed up in China, but we’ll focus on Europe here.

I’ll circle it back to China here in a minute. So, began to show up in Europe, then began to show up in the US. Inflation peaked first in Europe, and then it peaked here in the US at a lower level than it did in Europe. But it peaked in Europe for first. Then Europe began this disinflationary trend we’ve seen now, and the US followed. During all of that time, China was just one step ahead of Europe. Now China is, in fact in a deflationary environment. We expect China to continue to export that to the rest of the world.

So Europe cutting rates first, we think the US follows along with disinflationary statistics, economic data coming in here as well. So again, these are keys we look at to see where the Fed is going to follow. And we think the Fed again, two to three rate cuts for 2024 still on the table here. All right, that said, let’s take a look at our market action on the day today. Quickly here. You know, not a great day. Just one out of four major indexes high, higher on the day. And it was the Dow, as I mentioned earlier, up three quarters of 1% now at 39,134.

[00:19:30]:
So working hard to reclaim that 40,000 mark here, which it got to in May. So just almost exactly a month ago now. But if we can get this rotational aspect, we’ve still got some room to run on the Dow before we hit even overbought levels. We’re far, far from extreme overbought here after that. The S and P finished exactly flat pretty much on the day at 5473 again just right there at its all time high, just closing below its all time closing high. Next up, Russell 2000, down about four tenths of 1% to 2017. Then the Nasdaq was our laggard on the day to day, down eight tenths of 1% to 17,721. So you do hate to see, you know, an all time high close lower below the previous day’s close.

A lot of people would call that an outside day, which could signal at least a short term reversal here. Again, if you listen to the beginning of this podcast, you know that we would see that as nothing more than a pause. Sometimes they can go on longer than people anticipate, but we’d still use it as a buying opportunity. And if you want to know the culprit on the day, Nvidia again, hitting an all time high this morning. Just a massive move this has been, but ultimately finished down three and a half percent on the day to day. So this is when we want to see the other names start to hold up this market. The names that aren’t overbought like an AMD per chance out there, which is actually closer to oversold levels here, and led the way today up 5%. In the long term.

We think Nvidia is going to be the absolute winner here. But you want to see a rising tide, lifts all lift all boats. And when you get this rotation out of the mega cap names, a rally in AMD, in Micron and Broadcom and Qualcomm, if we were able to get some, at least some of those rallying, then you keep the sector as a whole right in the range of all time highs. You keep the Nasdaq right in the range of all time highs. Again, we look at that as healthy bull market action. All right, that being said, let’s take a look at our internals on the day to day. We’ve talked about this here often. We haven’t seen great internals recently, and today was no different.

[00:21:54]:
So not hugely surprising as we did finish mixed on the day, but we did get a few bright spots in here. We did have more declining stocks than advancing stocks. Just barely are on the NYC, a little bit worse on the Nasdaq, but no two to one beats here or anything like that. So no big losses there. Just again, you know, blocking and tackling. Staying in the race here from the positive side of internals, and as Kip has talked about a lot, I’ve talked about a lot here on the podcast as well, is that these are the kinds of sessions where you would expect the bears to get a little bit of traction. And who knows, that might begin here at these levels. But we haven’t seen it yet.

Despite every opportunity that the bears have had, buyers keep stepping in for this market. We think that that will continue as well over the medium to long term. That is. Next up, 52 week highs and lows. Slight bright spot here. Coming in just barely. Positive for the NYSE, negative for the Nasdaq again, though not a big beat. Lastly here, volume also managed to come in positive on the NYSE today.

Just slightly negative on the Nasdaq. So no real, you know, big movers here on the day from the internals. Not too bad on a day when tech is leading lower. All right, looking at our sectors on the day today, as I mentioned earlier, the rotation to value names here, energy leading the way has been an unloved sector. Since it was the best performing sector in the world just a couple years ago, we wouldn’t be surprised if energy started to make a bit of a comeback here. It’s a group that we remain long as well. After that, we had utilities. As yields are now lower on the day, we’re a little bit higher earlier in the session.

[00:23:42]:
No surprises there. We do continue to expect yields to head lower, although like with everything not in a straight line, move lower after that. Financials, which we have wanted to see improve here. No love for the big banks, or even the regional banks for that matter, but you need them participating as part of a healthy bull market. And the regional banks have been able to hold above their 200 day moving average now for two sessions in a row. You know, not big confirmation there, but good to see. We want to see it. Stay there then.

Our lagging sectors on the day, as you might expect, tech led the way lower, followed by real estate and consumer staples, real estate at these levels, specifically the home builders. Getting back to some attractive levels here. Stay tuned. Come and join us@vraletter.com. for our two free week trial to know the next moves we’re going to make there. All right, finally here for today, our VRA commodity watch with some green on the screen here today, gold now up 1.14% to $2,373 an ounce. And just what you want to see, the gold miners had a big day today. Earlier in the week, we pointed out the Fibonacci retracement here that went back perfectly to the Fibonacci levels.

And we continued the bounce above it today in a big way, up two and a half percent here for GDX. We want to see that continue for the miners. Bodes well for the rest, really bodes well for gold going forward after that. Silver having a big day today, getting back above $30 an ounce, up 4% to $30.78 an ounce. Copper up over one and a half percent to $4.56 a pound. And oil also having a solid day here today, up six tenths of 1%. So not a huge day, but hitting its highest level since the end of April here at $81.24 a barrel. Folks, that is all that we have time for here today.

[00:25:47]:
Please be sure to subscribe to receive our VRA podcasts every day at the market close. You can sign up@vraletter.com click that podcast link at the top and we’d love to have you with us. Thanks again for tuning in. Until next time, we’ll see you back here tomorrow for the close.e

Podcast Newsletter

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Time Stamps

00:00 Stock market reaches record high, overbought conditions.
03:14 Extreme overbought levels, caution needed in market.
07:10 Exciting catalysts and smart money front running.
10:30 Money market accounts miss out on gains.
14:49 Interpret data signals toward controlled inflation trends.
17:14 Central banks show potentially dovish tendencies.
20:23 Stock volatility signals potential buying opportunities, especially AMD.
23:02 Nasdaq slightly negative, tech leading lower. Energy shows potential comeback.
25:47 Subscribe to VRA podcasts for market updates.

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