U.S. equity markets are flying, and with the bull market well and truly resumed, I think there's a lot more coming. Investors are spoiled for choice when it comes to ways to own stocks today, with countless exchange-traded funds ("ETFs") that are well-managed, and also extremely cheap to own.
One such fund is the Vanguard Total Stock Market Index Fund ETF Shares (NYSEARCA:VTI), which is making new highs as of this writing. In this article, I'll explain why I think we may be due for a slight consolidation, but it is my belief we'll then be off to the races higher again.
What is VTI?
Put simply, VTI is an exchange-traded fund that is managed by Vanguard, a legend in the mutual and exchange-traded fund world. Vanguard is known for its very low-cost index funds, and VIT is certainly one of those. It is a diversified fund that includes various sectors, market caps, value, and growth names, etc. This is, as the name suggests, a total market fund. The fund seeks to track the CRSP US Total Market Index, intending to represent 100% of the U.S. stock market.
As such, the holdings list is broad and deep.
The top 10 holdings contain almost exclusively tech names, but we can see that if we remove the 27% that is comprised of the 10 mega-cap names above, the remaining 73% is made up of 3,786 stocks. The overwhelming majority of these stocks have infinitesimally small percentages of this fund, but the point is that this is an extremely diversified fund that should roughly approximate the returns of broad indices such as the S&P 500, generally speaking.
I've written multiple articles here on Seeking Alpha espousing the virtue of focused exchange-traded funds to gain an advantage over simply buying index funds, but I also recognize that level of risk and maintenance isn't desired by everyone. VTI is the other end of the spectrum; it just owns everything.
Technology is by far the heaviest weighting, driven primarily by the mega names in the top 10 holdings. Outside of tech, VTI is well diversified in the other sectors. That has its benefits, as you're always guaranteed to be in whatever sectors are performing best at any time, but the inverse is true as well, and you're always going to own at least some of the worst sectors in the market.
I mentioned VTI was cheap, and I wasn't kidding. It costs three basis points to own, and is extremely liquid, with an average bid/ask spread of just one basis point. In the world of ETFs, these are epic numbers. VTI is a tremendously well-managed fund, so it checks all the boxes from an operational perspective.
Now that we've got a baseline for how VTI operates, let's take a look at the path forward.
New highs are just the beginning
I mentioned that VTI is making new highs, and by that, I mean relative highs, not all-time highs. I believe all-time highs are just a matter of time, but we'll come to that; let's start with the here and now.
VTI made a critical breakout a few days ago, cresting the $228 level from July 2023. The fund has traded higher in the ensuing days, confirming the breakout. Generally, when a security breaks out like VTI has, it will have some sort of retest of the breakout area. It doesn't always happen, but I believe we'll get a shot at that with VTI.
First, the PPO was extremely overbought and flattened a couple of weeks ago. In other words, momentum is not confirming the move up in price, putting in what is deemed a negative divergence. That is not a guarantee that VTI has to come down, but it is a warning sign that it could do just that. That would be welcomed, as VTI has been on an absolute heater since the October bottom, and could use a period of rest to recharge bullish momentum. We'll see, but my base case is sideways to a slightly lower period of rest that may only take a few days but would do wonders in terms of resetting momentum.
Next up beyond $228, support is the rapidly ascending 20-day exponential moving average, which is currently $225. I don't think we'll see a test that low anytime soon, but if we do, I would view that as a gift and it would be a terrific buying chance if you're so inclined. Ideally, the consolidation would test breakout support and the 20-day EMA simultaneously as the latter rises to the former, but we'll see. Regardless, that means the maximum downside exposure at the moment is less than $5, and I think we'll get the chance to lessen that risk, probably in the coming days, as price and support levels may converge.
Seasonality is mostly favorable today as well, with December averaging 1.5% returns, and January adding a further 1.8%. I will say that while those numbers are good, only two of the past five January periods were actually positive. I think that given we're in a secular bull market, odds are good we get a strong January this time around, but it's something to consider.
Let's finally zoom out to the weekly chart and get a longer-term perspective, which in my view supports the bullish short-term perspective.
We can see the all-time high of $237 is well within striking distance here, as it's less than 4% away. Both of the moving averages on the weekly chart - similar to the daily chart - are in firm uptrend. We have a series of higher lows and now a higher high, so the bulls really are firing on all cylinders.
Momentum was reset nicely earlier this year as the weekly PPO nearly reached the zero line, but is rocketing higher again. If anything, the weekly chart makes me even more bullish on VTI.
Wrapping up
As I said above, I generally tend towards focused funds because if you can correctly spot the sectors that are set to outperform, it can make a huge difference in your total returns. However, there is value in a buy-and-forget fund like VTI, which just gives you exposure to everything. If that's your thing, look no further than VTI, as it's an outstanding fund that I also happen to think is going a lot higher into 2024. I'm initiating VTI with a strong buy rating given these factors.
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