VRA Investment Update: The Fed Freaks Out.
Good Thursday morning all. The good news? Both the S&P 500 and Dow Jones hit (intraday) all-time highs yesterday. The bad news? It didn’t last long.
Following the FOMC minutes, with news that several on the Fed say they want to have “multiple rate hikes, quickly”, the markets took an immediate turn south with the Dow finishing -1%, S&P 500 -1.9% and Nasdaq and Russell 2000 down a big 3.3%
I missed this completely. After Mondays dramatic move higher in semis/tech, in the face of sharply higher rates, it looked to me that the markets were coming to their senses over higher rates…meaning that they were figuring out that, historically, early rate increases are HIGHLY bullish for stocks…because of course, that's been exactly the case.
That was the hallmark of the 1995–2000 dot com melt-up as well, certainly the final stage of the melt-up which saw Nasdaq skyrocket over the last 18 months of that historic move higher from 1357 to 5132, a parabolic blow-off top of 278%.
What was that repeating hallmark that sent the nasdaq to mars? Higher interest rates, namely on the 10 year, which saw its yield scream higher from 4.14% to 6.78% (from Q4 1998 to Q1 2000). Yes, rates and stocks soared higher together.
Lets start there….1995–2000. During that 5 year, unprecedented moonshot, which saw the Nasdaq soar almost 600% (117%/yr compounded), the yield on the 10 year T-Note “averaged” better than 5%. Today, the 10 year yield sits at 1.66%. But again, check out that final move higher in rates below (from 4.1% to 6.7%)…because its that move higher that also marked the true melt-up in stocks. Are we seeing this same dynamic beginning to play out today?
Here’s the chart on 10 year yields from 1995–2000. How remarkable that permabears are worried about rates rising today, even at these low (comparative) yields…admittedly as we have a mountain of debt, with QE the primary driver for low yields.
Folks, we’ve said this for some time, because historically it's a repeating pattern of vast significance. Early interest rate hikes are HIGHLY bullish. My mentors called it “3 steps and a stumble”, meaning that stocks rallied along with rates through the 3rd Fed rate hike. As Ed Hyman and team at Evercore have pointed out of late, early rate hikes are not only bullish, they are extraordinarily bullish. Both Q1 2022 and the full year could produce another period of excellent returns. We expect exactly that.
And here’s that chart of Nasdaq that saw it skyrocket over the last 18 months of that historic move higher from 1357 to 5132, a parabolic blow-off top of 278%. We believe this period is most similar to that 1995–2000 melt-up, hence our targets of Dow Jones 100,000 and nasdaq 40,000 (by 2027).
As of now, I jumped the gun on that call.
But I repeat: I’ll be shocked if I’m proven wrong over the medium-long term. As long as I’ve been in the business, the markets have loved higher rates, through at least the 3rd hike. “3 steps and a stumble”
A panicky Fed is the last thing that Team Biden (permanent ruling class) wants for the midterms. Absolutely the last thing.
Aggressive rate hikes in an election year, when Dems are running the show in DC, is an oxymoron of size and scope.
Evidence: Under “W”, 17 straight rate hikes from 2004–2006 (hence the housing crash). Under BHO, just 1 hike over his 8 years. Then, in just Trumps first 2 years, 8 rate hikes.
The permanent ruling class doesn’t do much of anything to hurt their favorite party.
Ipso facto; I’ll give the Fed one rate hike this year. Just enough for Powell and his merry band of masters of the financial universe to show their faces at dinner parties. Beyond that, we’re looking at a significant pattern change…in an election year, no less.
My experience with Fed meetings/minutes is that the initial move of the markets, following Fed jitters, has quite often proven to be the wrong move. I still look for the markets to rally. But yesterday was ugly (although the internals held up much better than the losses indicate). If the Fed wanted to freak the markets out, they’ve just succeeded.
Also know this; most everything I’ve written above puts me in the vast minority of market watchers/economists. That’s never been a problem for me. It’s not now. Show me a year when the majority of economists have been right and I’ll eat my hat.
Prediction: “something” will happen that changes the Fed’s aggressive hawkishness. I believe that “something” will be a slowing US and global economy. But I will must also state that my prediction flies in the face of what our favorite Wall Street research firm (Evercore and the unmatched Ed Hyman) sees. They see an economy that continues to soar, with inflation that rules the day…meaning that they too believe Fed tightening and rate hikes are “real” and will “continue”.
But I think we have a key bond market indicator that is telling us “the move higher in rates is about to take a breather”. And it’s lining up with near perfection on the VRA System.
TLT (20+ Year T-Bond ETF)
TLT just tagged its 200 dma, while also hitting extreme oversold on stochastics and MACD, while approaching extreme OS on MFI and RSI.
The rubber band is getting stretched here. Another day or two of bond market weakness and we’ll be at “extreme oversold on steroids” on the VRA Investing System.
And yes, we are looking for a leveraged ETF to play this counter move in the other direction (just as we’ll be doing in Parabolic Options).
Until next time, thanks again for reading…
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