A big test for the market... Just 1% from new highs... 'The biggest bull trap ever'?... More praise for P.J...
After the rebound rally of the past five weeks, the benchmark S&P 500 Index is now up around 12% from its September "retest" lows. And it's now trading just 22 points – a little more than 1% – from its all-time high of 2,131.
"Breaking out" above this level is one of the three hurdles our colleagues Brian Hunt and Ben Morris need to see the market clear before becoming bullish again. As they shared in the October 27 Digest...
Before we'll trust the uptrend, three things need to happen:
1. The S&P 500 needs to break above its 200-day moving average,
2. The 200-day moving average itself needs to turn higher, and
3. The S&P 500 needs to close above the 2,131 level.
Last week, we noted that the market had already met the first two of these items. And now it appears the third is within reach. This is another bullish sign.
Again, it's still early. As Brian and Ben explained last week, false signals are common... so it isn't yet time to get aggressively bullish.
Our colleague Jeff Clark agrees...
Jeff prefers a slightly different moving average – the 20-month exponential moving average ("EMA") – as the "defining line" between bull markets and bear markets. But its purpose is the same.
When the S&P 500 closed below its 20-month EMA in September, Jeff too said the bull market was in question. But he also warned that stocks were extremely "oversold" and that a violent bounce could be starting. Of course, that's exactly what happened...
The S&P 500 rallied more than 8% last month, and closed the month back above its 20-month EMA. And as he explained in today's edition of our free Growth Stock Wire e-letter, titled "This Could Be the Biggest Bull Trap Ever," technically, this means the bull market has returned...
Take a look at this monthly chart of the S&P 500 plotted with its 20-month EMA...
The red circles on the chart show the starts of the bear markets in 2000 and 2007. They both started as the S&P 500 closed below its 20-month EMA and a few months after the moving average convergence divergence (MACD) momentum indicator turned lower from an extended position (the red arrows).
We saw the same sort of move in 2011... the S&P 500 dropped below its 20-month EMA (the blue circle) and the MACD turned lower as well (the blue arrow). But that action was a fake-out. The S&P 500 spent only one month below its 20-month EMA. It quickly reversed and rallied back above the line. At the same time, the MACD indicator turned higher as well. That action reinvigorated the bull market. We've had four years of solid gains since then.
But Jeff isn't convinced just yet. In fact, he believes this could be one of the biggest false signals – or "bull traps" – ever...
With the index back above its 20-month EMA, the current setup looks similar to 2011's, but with one glaring difference... The MACD indicator has not turned higher.
Despite the huge rally in October, the momentum behind the move is lagging. This "negative divergence" is a warning sign of a pending reversal. It's something that hasn't happened before on the monthly chart of the S&P 500 – at least not in the past 15 years. And it's a reason to stay cautious.
It's certainly possible that the stock market could surge to new all-time highs from here. November and December tend to be strong months for stocks. But if the MACD indicator continues to lag, then any further gains in the market are likely to be temporary. It's also possible that the S&P 500 could dip back down and finish November or December below its 20-month EMA. That action would whipsaw the bulls just as much as last month's action wiped out the bears.
As we always like to remind readers, Jeff is a trader. As editor of the Stansberry Short Report and Stansberry Pro Trader advisories, he focuses mostly on short- to intermediate-term positions – trades lasting several days to several weeks. So many of his recommendations may not be applicable for longer-term investors.
But his advice today is prudent for investors and traders alike...
With the S&P 500 trading back above its 20-month EMA, the bulls have the momentum. They also have the strength of the seasonal bullish period between now and the end of the year. But this isn't a time to go "all in" on the long side. Stocks are now overbought and there's plenty of risk of a reversal.
So just as early October was not the time to get aggressive with short sales despite the appearance of a new bear market, now is not the time to get aggressive with long positions.
New 52-week highs (as of 11/2/15): none.
The overwhelming show of support for our new colleague P.J. O'Rourke continues. Send your reactions – good or bad – to feedback@stansberryresearch.com.
"A professor in a government class at Texas A&M University in 2001 assigned Parliament of Whores as reading for the course. I thoroughly enjoyed it and have followed PJ loosely ever since. He has a very unique and accurate perspective on life, and is able to find humor in situations that would otherwise be frustrating to hard-working, America-loving patriots. Welcome PJ, we are glad to have you!" – Paid-up subscriber Clint J.
"Great! P.J. O'Rourke! I've been enjoying reading him since his hilarious 'tourist' trip to Lebanon in the 80s (when suicide bombers were a new novelty). Holidays in Hell and All The Trouble In The World are on my bookshelf, and still visited with delight. Another great from the Buckeye State. I hope he's quit smoking, so we'll have him around for many more years to comment on this 'Great Republic' as Mencken used to say. He is a great successor to H.L. – I don't understand why you folks in Baltimore don't honor him more. Good recruiting Porter." – Paid-up subscriber DV in OH
"I belly laughed through the entire article! Thanks for the joy of a really good laugh!" – Paid-up subscriber Jack C.
"What a coup!!! You enhanced your credibility in my estimation 1,000% with this announcement. I have all of PJ's books and have quoted him many times. In fact, I have one of his quotes on the door of my office to remind me of things that I must keep in mind to center my life. It is right in there with quote from Aristotle, St. Thomas, and various other philosophers which I am sure would simultaneously make him feel good and laugh out loud:
"'There's a whiff of the lynch mob or the lemming migration about any overlarge concentration of like-thinking individuals, no matter how virtuous their cause.'
"Like PJ, I'm a State College graduate who has over-achieved considering the limitations of my background and education." – Paid-up subscriber K. Tacoma
"Porter – you have cool friends. I first read P. J. O'Rourke in the July 3rd, 1986 Rolling Stone. The article, 'What's Really Wrong With Europe' was the funniest thing I had ever read. I had to stop several times to breathe and wipe my eyes – no kidding. His gift is rare – writing on the driest of subjects (politics and economics) with the most delicious felicity of stabbing wit. If H.L. Mencken, Henry Hazlitt, Mark Steyn, Richard Pryor, and Steven Wright all had a baby (sorry for the visual), they would name him P. J. for Political Jocularist (or Patrick Jake). Even the Acknowledgments in his books are funny – and they reveal a deep vein of gratitude and self-deprecating humility that is cold water on a hot day. With the addition of Mr. O'Rourke to your peerless and fearless team, you have honored your subscribers by treating us as friends. Thank you!" – Paid-up subscriber LAF
"At last, someone who can make sense of American politics for those of us who don't live there." – Paid-up subscriber Andrew S.
"Hi Porter, I am ecstatic to hear that Mr. O'Rourke will be a member of the Stansberry team. It was during the Nashville Stansberry Conference where I saw him LIVE. He is a very humorous and full of wit. His afternoon session lit up the crowd who were desperately fighting food coma. I've enjoyed his every speech and writings since you folks introduced him to us. The Stansberry editorial team is already world-class, now this is just icing on the cake. Whatever you do, please don't make him relocate to downtown Baltimore. Thank you Porter and welcome P.J.!" – Paid-up subscriber Michael M.
"Hi Porter, Kudos for adding PJ O'Rourke to the 'Brain Trust.' The world is spinning into self-delusion, and while PJ's satire may not cure it, it'll make those of us who are actually paying attention smile amongst this economic insanity." – Paid-up subscriber Doug Braun
"I think having P.J. O' Rourke on board as a contributor with Stansberry Research is a great decision. I have had 'Eat The Rich' in a prominent place on my bookshelf for many years and still dip into it on occasion for amusement and enlightenment. The chapter on Cuba as an example of Bad Socialism is my personal favourite.
"His first article for the Stansberry Digest on the presidential candidates had me laughing out loud several times as I read it this Saturday morning. I look forward to reading more of his work here. Please convey my good wishes to P.J. from here in Ireland." – Paid-up subscriber Patrick Crowley
"Porter, O'Rourke's presidential candidates review left me laughing so hard and my eyes watering so much, I won't need my eye drops for a month. Great addition to the Digest." – Paid-up subscriber Dave Embry
"Been a big fan for years and years. Great addition to the team. Hopefully you can share some of his multitudes of classic quotes and commentaries. PS: I prematurely sent the response before I read the rest of the digest and his commentary because I was so excited about his addition. You can consider my subscription secure. I absolutely love this guy." – Paid-up subscriber Bob S.
"P.J., I had the pleasure of attending the Las Vegas conference this year and briefly met you before one of the breaks. I've followed your work for a long time and have enjoyed listening to you for years now on the 'Wait Wait... Don't Tell Me' quiz show.
"To Porter, I simply want to pass along personal thanks for bringing P.J. on board. This is likely the perfect time to add a voice like his if the looming bond crisis turns out to be as bad as you are predicting (and given your track record I would think that's fairly likely). While you and the other editors will remind us what we should do to weather the crisis financially, P.J. will provide us with a reminder that in every crisis there's something we can find to laugh at. Keep up the great work!" – Paid-up subscriber Kenneth N.
"Hello P.J., I just finished reading your inaugural article for the Stansberry Digest (on presidential candidates, no less – nice juxtaposition!). Your analysis is hysterically spot on – unfortunately, scary for all the same reasons! You just acquired a new fan. My hat's off to you and the Stansberry group. I greatly anticipate your forthcoming Friday gems and wish you and your family all the best." – Paid-up subscriber Joe Fusco
"Dear Porter, Your most fantastic catch has never been what you've caught on your boat. Rather, that honor goes to snagging P.J. O'Rourke (hope he didn't put up too much of a fight). He's a (mostly) unrecognized national treasure, and the only man on earth who can make you laugh at least twice per sentence. Great job, and I am eagerly awaiting P.J.'s next epistle." – Paid-up subscriber Stephen K.
"Dear Porter & crew: I don't recall ever reading P. J. O'Rourke before but... That. Was. Fantastic. A big welcome to him! (And I am going to look into OneBlade.)
"Dear Mr. O'Rourke, Please accept my congratulations and warmest welcome regarding your decision to join the Stansberry Team.
"As a longtime subscriber to Porter's research, dating back to the days of Pirate Investor, and I can assure you that you are joining forces with one of the top teams in the industry. Given the considerable accomplishments and talent you yourself bring to the party, it is only appropriate that Porter would add you to the team.
"As a long-time follower of your work as well, I am truly excited to see your on-going contributions to the Digest and the opportunity to experience your rapier wit on a weekly basis. Given the sharp edge of your humor, one is forced to wonder why Porter has not already signed you up as the spokesperson for OneBlade. It is difficult to imagine a better fit of brand identities. Best regards and better profits." – Paid-up subscriber Ken McGaha
Regards,
Justin Brill
Baltimore, Maryland
November 3, 2015
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