Markets Continue to Rally Into an Unsteady September

Nicholas Vardy

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

The U.S. stock market closed the summer on a positive note, with the Dow Jones up 0.45%, the S&P 500 gaining 0.48% and the NASDAQ jumping 1.01%. The MCSI Emerging Markets Index rallied even more, gaining 3.44%.

Big gainers in you Alpha Investor Letter portfolio included BYD Company, Ltd. (BYDDF), which rose 4.79%; the KraneShares CSI China Internet ETF (KWEB), which gained 4.37%; the PureFunds ISE Cyber Security ETF (HACK), which rose 2.98%; the Cambria Global Value ETF (GVAL), which added 2.89%; and Markel Corp. (MKL), which recovered 2.82%.

A bevy of your positions hit a new 52-week high. These include Berkshire Hathaway (BRK-B), Vanguard Russell 2000 Index ETF (VTWO), Cambria Global Value ETF (GVAL), AdvisorShares Wilshire Buyback ETF (TTFS), KraneShares CSI China Internet ETF (KWEB) and BYD Company, Ltd. (BYDDF).

Two positions — Markel Corp. (MKL) and Albemarle Corporation (ALB) — rose back above their 50-day moving averages and are now a BUY.

The stock market continues to confound my expectations by crawling steadily higher. The Nasdaq Composite even closed at a new all-time high yesterday, something it has not done in the month of September since 1999 when the Internet bubble was at its very end. Market breadth — the ratio of rising to falling stocks — also turned positive again. The put-call ratio hit its lowest level in weeks, and even going back to 2009. With two equity calls traded for every one put on Tuesday, speculators are clearly betting on the market to continue its upward run.

With the S&P 500 in an earnings recession, the U.S. market’s breakout to the upside is puzzling. And from a historical standpoint, the market’s remarkably low volatility is also cause for concern. The one-month volatility of the S&P 500 index remains near all-time lows, and the index has not seen a one percent price move, up or down, on any day since early July.

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Market volatility tends to revert to the mean, and that often signals a market pullback. Potential triggers for a shift include an upcoming interest rate hike by the Fed, high stock market valuations, volatile oil prices and the growing likelihood of a Trump presidency.

And don’t forget, September ranks as the worst month for stocks, generating an average price return for the S&P 500 of negative 0.5%.

As I’ve said before, I hope I am wrong.

But it’s best to gird yourself against the worst.

Portfolio Update

Vanguard Russell 2000 Index ETF (VTWO) added 0.56% over the four-day trading week to hit a new 52-week high. It’s been a stock-picker’s market over the past months, and with trading volumes light and volatility low, many of the common names just aren’t performing. One exception to this trend has been individual names in the small-cap sector, and the recent sustained move higher in VTWO reflects this bullish theme. VTWO is a BUY.

Markel Corp. (MKL) rose 2.82% last week on significant gains it experienced last Friday and Tuesday. Markel has been a market outperformer for quite some time now, and its triple-digit performance of the last five years is a testament to that. Markel is up nearly 50% in your portfolio, making it the second-highest return in the Alpha Investor Letter portfolio. MKL moved above the 50-day moving average (MA) last week to become a BUY.

First Trust US IPO ETF (FPX) gained 1.31%, closing out yesterday just pennies below its 52-week high. The initial public offering (IPO) market hasn’t been strong overall this year, but market watchers expect this to change soon. Technology firms in northern California have been sitting on IPO filings, waiting for a bullish environment. With Q4 around the corner, expect FPX to perform strongly. FPX is a BUY.

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PayPal Holdings (PYPL) gained 0.49% over the shortened holiday week. Reports continued to emerge regarding PayPal’s efforts in expanding partnerships with both Visa and MasterCard. Gaining access to the mind-boggling online transaction base of either of these companies could be a catalyst for PayPal. PYPL is a HOLD.

KraneShares CSI China Internet ETF (KWEB) moved another 4.37% higher last week. This exchange-traded fund (ETF) has been a hot property since Morningstar knighted it with its five-star rating last month. KWEB is a BUY.

Sincerely,

Nicholas Vardy

Nicholas A. Vardy

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