VRA Investment Letter: Chinks in the Armor Produce Buying Opps. It's All About the Shutdown. $1 Trillion in Liquidity Nearing.

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Good Friday morning. Today we’ll cover some of the “chinks in the armor, of this market, then we’ll get to the government shutdown, and finally we will wrap the week with the markets and economy.

While our markets reached heavily overbought levels last week, with the S&P 500 13% above its 200 dma, these were not markets that hit extreme OB levels, which should greatly reduce the risks going forward (certainly as we’ve entered the best month of the year…and the best 6 month stretch). The obvious point here is that bull markets have shakeouts. Not some of them, all of them. What’s more likely here is that in addition to our markets coming a long way in a short period of time, we’ve seen some chinks in the armor of late that have added uncertainty for investors:

– SCOTUS decision on Trump’s tariffs is coming. As Trump and Bessent have stated often, should SCOTUS reverse this policy it will have a negative impact on the economy (and markets). First, a ruling isn’t expected until sometime in 2026 (typically it’s a June decision, although this could be expedited to earlier 2026). Team Trump says they have backup plans in place, either way. But again, this is not a ruling for the very near future.

– NYC electing a communist mayor

– Yes, high interest rates are having an impact on the economy, certainly for the 2nd America and for the most important leading indicator for the US economy (housing). Rates are at least 1% too high today, with 30 year mortgages that should be sub 5% today (a complete game changer for buyers). We’re now 6 months away from Powells departure at the Fed and what will be a near immediate reversal in interest rate policy. As a reminder, the markets anticipate 6 months out, meaning that we’re there…right now.

– 2 million illegals have left our country (either through self deportation or ICE capture). And yes, this is a big enough number to negatively impact the economy in the short term (certainly for consumer purchases of basic necessities).

– Chief among these concerns, in our view, is the shutdown, especially now that airline travel is being reduced by 10%. But while nothing is imminent, there does appear to be movement in congress to reopen the government. The shutdown is causing issues, without question, with the left using it as pure leverage. Many of these issues are reaching the “urgent” category.

Key Shutdown Impacts
 

  • Federal Workers and Economy: Over 670,000 employees remain furloughed, and 730,000 are working without pay, leading to daily economic losses of about $400 million in compensation. The CBO estimates a potential 1–2% GDP hit if it extends into December, with ripple effects on holiday spending.

  • Food Assistance Crisis: SNAP benefits for 42 million recipients have been halved for November, with no new enrollments possible and uncertainty for December. While we’ve learned that most on food stamps aren’t even Americans, the pain is real.

  • Travel: Starting today, the FAA is cutting 10% of flights at the nation’s 40 busiest airports due to unpaid air traffic controllers. Transportation Secretary Sean Duffy warned of “mass chaos” and potential airspace closures if it drags another week.

  • Other Impacts: National parks are partially closed, Head Start programs for 750,000 low-income children risk running out of funds by December, and furlough extensions through November 29–30 have been issued across agencies like the Department of Commerce and GSA.


Signs of a Potential Resolution

Bipartisan talks in the Senate have gained momentum over the past week, with a group of senators (including moderates on the left) nearing agreement on a “minibus” package combining short-term funding with targeted modifications. It’s looking increasingly likely that the shutdown may end soon…possibly within days…if today’s Senate vote advances a compromise CR. The mounting public backlash (flight cancellations, missed paychecks and hunger risks) is pressuring both sides, with hopes that moderate lawmakers can push for a pre-Thanksgiving deal to avoid the holiday fallout.

And the Biggest Reason The Shutdown Has Mattered to the Markets; a Lack of Liquidity

The Treasury General Account is about to break$1 trillion,with the Treasury unable to invest these funds because of the shutdown.The only time this total was bigger was during the plandemic. In addition, the Fed’s QT program will end in December…that’s $70 billion in bond sells each month (impacting rates).Bottom line, as seen below, there is a huge amount of liquidity that will begin coming back into the economy/markets, once the shutdown is over. Liquidity in the markets is “everything”.


VRA Market Update

This remains a bull market where dips should continue to be bought. As you’ve heard me say often, this is the most bullish I’ve been in my 4 decades. Again, just know that shakeouts happen…a perfectly normal and healthy function of big bull markets. Here at the VRA we’re (primarily) long term position builders. We take stakes in companies that we believe in…winning investments…and use monthly dollar cost averaging to continue adding to these positions, which removes the emotion of trying to time our purchases. Along with our trading approach using ETF’s, this combination is how we’ve outperformed the markets in 18/21 years (with 41.8% gains through Q3).

We also believe (heavily) in a well-diversified portfolio. It’s a key to investing success. Using the VRA Investing System, we’re also typically well diversified across multiple industries and sectors, as we are today with positions in growth stocks (tech), small caps, energy, precious metals/miners, cryptos and housing. We believe this exact approach will continue to lead to dramatic gains in the markets, likely into the 2030’s. This is “that” bull market.

As the excellent TrendSpider pointed out this morning, from just after the tariff mania 4/7 lows, the S&P 500 has traded in a bullish ascending channel, and its nearing its bottom channel line now. While we’ve yet to reach oversold levels on the VRA System, let’s see if this channel remains intact. If not, a move to the 50 dma may be tested, a level that’s held since May.



Also important is the radical decline in investor sentiment, as seen below in the Fear & Greed Index, which plummeted from 44 earlier this week all the way down to 17 today, which is a reading of “extreme fear”. It’s hard to overstate how bizarre it is to see sentiment this weak when we’re just 3–4% below ATH’s. Bullish tell.



VRA Bottom Line; we are in the (very) early innings of this Innovation Revolution. In dot-com terms, I’d put us in early 1996 (but this bull market will last much longer). From the bear market lows of 10/13/22, smart money investors have used dips as a buying opportunity. Once again, that’s how we see this playing out. Just remember that shakeouts are a normal part of every bull market. Our job, as long term investors, is to make sure our portfolios are diversified and constructed without the use of extensive leverage. Margin accounts can be the portfolio killers in 5–10% bull market pauses. We weathered tariff mania because we used this approach, putting up gains of 41.8% through Q3. Once the shutdown ends, this shakeout ends.

Until next time, thanks again for reading.

Kip

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