Stocks Bounce Strongly Across the Board

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Stock markets bounced strongly over the past week, with the Dow Jones up 4.62%, the S&P 500 rising 5.09% and the NASDAQ recovering 5.11%. The MCSI Emerging Markets Index soared 8.32%.

All positions in your Alpha Investor Letter portfolio gained last week, most quite significantly. Google Inc. (GOOGL) rocketed 7.87% higher. The WisdomTree Japan Hedged Equity ETF (DXJ) added 6.14% and nearly all of your other holdings rose between 4% and 5%.

Google Inc. (GOOGL) moved back up above its 50-day moving average to once again become a BUY.

Ever since the mini-panic on Aug. 24, when sentiment readings have reached the level they did then, an overwhelming number of times stocks have traded higher later on. The key was to wait for a test of the previous bottom to occur, then see how investors reacted as prices approached the previous low. It turns out investors bought with a vengeance. With the intraday reversal on Friday and follow-through on Monday, the S&P 500 rallied the most over a five-day period in more than a year.

As sentimentrader.com points out, buying pressure has been strong across all NYSE stocks. The Arms Index (better known as the TRIN) had been low every day during that streak. Anything below 1.0 is considered to show buying pressure and above 1.0, selling pressure. During the five days leading into Tuesday, the Arms Index averaged only 0.61, an exceptionally low reading that hasn’t been seen in five years. And as it turns out, there have only been two other times in the past 20 years that the S&P 500 has had such buying pressure on the NYSE that the five-day Arms Index dropped below 0.65. Those two times were October 2002 and March 2009, each of which marked the end of the last two bear markets.

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Combine this with upcoming strong seasonality, and the outlook for the stock market for the remainder of the year is quite bullish. You can also expect that we’ll be gradually re-entering some of your watch list positions in the weeks ahead.

Portfolio Update

Vanguard Russell 2000 Index ETF (VTWO) jumped 4.59% over last week’s market rebound. Although talk of a Fed rate hike can be a scary proposition for investors, history shows that buying on a rate-hike-induced dip can be quite profitable several months down the road. In fact, the small cap supercharged VTWO is historically up an average of 12.1% six months after a rate hike and up 15.6% one year after a rate increase. VTWO is a HOLD.

Cambria Global Value ETF (GVAL) also rose on strength last week, gaining back 4.91%. This play on the cheapest markets in the world should perform well if my thoughts on a strong fourth quarter play out — which I outlined in yesterday’s The Global Guru article. When “cheap” funds begin a sustained rise, they typically get off to a fast start and gain quite quickly. GVAL now stands just under its 50-day moving average (MA) and could move above that level even today, but it stands at a HOLD as of now.

Google Inc. (GOOGL) rocketed 7.87% higher last week as well. Although you still have the symbol “GOOGL” listed in your trading account, if you check the name next to it you’ll see that it is now trading as “Alphabet Inc. CL A” — and has been since Monday. However, don’t expect anyone to stop calling Google “Google,” as this term is firmly embedded in the world’s psyche and likely will be for quite some time to come. GOOGL moved above its 50-day MA and is now a BUY.

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Guggenheim S&P 500 Equal Weight ETF (RSP) gained 5.43%, outpacing the 5.09% rise its traditionally weighted big brother, the S&P 500 Index (SPX), turned in last week. RSP is close to its 50-day MA but remains a HOLD.

WisdomTree Japan Hedged Equity ETF (DXJ) gained 6.14%. The Bank of Japan (BOJ) released news today that it will not be adding to the stimulus efforts it already has in place. The Japanese economic recovery is still chugging along, although not quite as strongly as its leaders might like, and the BOJ is expected to enact further easing at its next meeting on Oct. 30. DXJ is a HOLD.

Nicholas Vardy

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