VRA Investment Letter: "Making Money" @ 2pm est. ST Overbought with Another "Breadth Thrust" Buy Signal. FIFO.
/Good Thursday morning. Heads up: I’ll be on Fox Business “Making Money” with the excellent Charles Payne in the 2PM EST hour. Hope you can join us!
We have a lot to get to this morning…
Market Update
The VRA System sits at 8/12 screens bullish, a full-on buy signal. With each major index back above the 200 dma (except Russell 2000), with multiple breadth thrusts flashing strong technical buy signals (more on this later) and with the semis leading higher, this continues to be a great set-up for higher prices. From 4/7 we’ve said that these lows would likely represent both the lows for the year as well as the lows for the rest of Trumps presidency. That’s the medium-long term reality as we see it.
However, over the short term we do have an overbought market to deal with, as each major index has hit extreme OB readings…we’ve come a long way in a short period of time. This got our attention; yesterday’s total put-call ratio came in with the lowest reading since December 2010. Yes, the bulls are back…however, as contrarians this could well mean a short term pullback is in the cards.
Another “Breadth Thrust” Buy Signal
For only the 8th time in history, the S&P 500 has triggered a DeGraaf Breadth Thrust (55%+ S&P 500 stocks hit a 20-day high) and a Zweig Breadth Thrust within one month of each other. Here’s why this matters: in the previous 7 cases, the S&P has been higher 100% of the time over the next 6–12 months with average returns of more than 16% (six months) and 26% (one year). Powerful!
As we’ve been discussing, this relative strength chart of the semis to S&P 500 shows that from the (exact) markets lows of 4/7, the semis (SMH) have led the market higher. This is textbook bull market action. From the birth of QE (2008/2009), the direction of the semis has equaled the direction of the broad market. There is no better tell.
FIFO: Tesla and Nvidia
It’s been our view over the last month that first in, first out was in the process of playing out in both TSLA and NVDA, our two Mag 7 holdings. Both stocks led the market lower beginning in December/January and have since led the way higher from the 4/7 lows with gains of 55% (NVDA) and 60% in Tesla. We believe these two core holdings will continue to lead the market higher. Both should be owned, aggressively.
VRA Bottom Line: While the markets have hit extreme overbought levels (short term only) the comparisons to 2020…which also featured a 4–5 week bear market..are increasingly hard to miss. By August of that year we were back to ATH’s and it’s looking more and more likely that we may have a similar outcome this time (except that new highs should come sooner than August).
With just 69% of the S&P 500 above its 50 dma and only 52% above the 200 dma, this market has a lot of room to run before hitting OB levels that would concern us (85–90%). Our view remains that with institutional money on the wrong side (of just about everything), the potential for this move to resemble a melt-up is real.
Many of the world’s largest and most active investors are now being forced to cover their shorts and then go long. Double-buying…more fuel for the fire. With this new breadth thrust and with the semis continuing to lead higher, the lows are in and pullbacks should be short-lived. There’s simply too much money on the sidelines and this train has left the station.
Until next time, thanks again for reading…
Kip
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