A Correction Is on the Way
The bull market in Chinese stocks continues... China's official newspaper quotes Sjug... Dalio joins the 'Melt Up' crowd... A correction is on the way... 'Doc' is bearish for the first time in years... Last chance: The biggest night of the year for you and your money...
Congratulations to our colleague Steve Sjuggerud...
As regular Digest readers know, Steve turned incredibly bullish on China nearly two years ago. And he has been practically begging his subscribers to join him ever since.
Unfortunately, we suspect most of you are still on the sidelines.
You see, when Steve first started recommending Chinese stocks in 2016, they were downright hated. They had just suffered a brutal bear market that erased nearly half of their value in less than a year. And most investors– including even most Chinese investors – had no interest in owning them.
This included the vast majority of our readers, too... And they certainly weren't interested in subscribing to a brand-new service – Steve's True Wealth China Opportunities – dedicated entirely to Chinese stocks.
But Steve persisted... And anyone bold enough to join him has already made a small fortune. True Wealth China Opportunities are up an average of 58% with zero losing positions, including four triple-digit winners and 16 double-digit winners so far.
Despite these impressive returns, Steve remains incredibly bullish today...
You see, while Chinese stocks are up significantly, he notes most folks still aren't interested. And most investors – even most Chinese investors – still don't own them. But that is slowly changing...
Hedge funds and institutional investors are beginning to look at China. The financial media have started to report on big trends like the technological revolution taking place in the country and index provider MSCI's groundbreaking decision last summer. It's likely just a matter of time before "mom and pop" investors take notice, too.
Sentiment appears to be shifting inside China as well. Even the Chinese government itself could be having a change of heart. After years of discouraging stock market "gambling," it now appears to be encouraging folks to invest in Chinese stocks for the long term.
How do we know?
Because China's official state-run newspaper just published a story on Steve and his bullish thesis. As Xinhua News reported on Wednesday...
A-shares, or shares of companies based in the Chinese mainland and traded in China, will perform better than other equity market over the next five years, an investment specialist said.
"Hundreds of billions of U.S. dollars are going to flow into Chinese stocks whether or not that's a good idea, as investors are forced to follow the MSCI model and invest money into China," Steve Sjuggerud, founder of the investment advisory newsletter True Wealth China Opportunities, told Xinhua in a recent interview, citing global equity indexes provider MSCI's decision to include China A-shares into its indexes...
Another important factor influencing the future performance of A-shares market is the high value of nearly all global stock markets, and many stocks have been significantly overbought, Sjuggerud noted. "So if there was a downturn in U.S. stocks and European stocks, I believe that China A-shares would be a much better place to be," he explained...
In addition, Sjuggerud said he preferred blue-chip A-shares to smaller caps in Chinese stock market, adding that he believes the money will flow into blue-chip A-shares and expects a significant outperformance of blue-chips over smaller caps. "I think even Chinese investors are underweight China (A-shares), they don't have enough Chinese A-share stocks," said Sjuggerud.
Here in the U.S., Steve's 'Melt Up' thesis also continues to gain favor...
Several notable investors – including renowned "bubble spotter" Jeremy Grantham – have recently echoed Steve's bullish stance.
This week, Ray Dalio – the brilliant founder of Bridgewater Associates, the world's largest hedge fund – became the latest.
Speaking at the World Economic Forum in Davos, Switzerland, Dalio said he expects to see a "market blow-off" before the bull market finally ends. And like Steve, he believes the rally could run for another year or two in the meantime...
We are in this Goldilocks period right now. Inflation isn't a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws...
There is a lot of cash on the sidelines. ... We're going to be inundated with cash. If you're holding cash, you're going to feel pretty stupid.
Of course, even if Steve is correct and the Melt Up continues for years...
History suggests we're likely to see a significant correction or two along the way. And we suspect the first one could be just around the corner. Regular readers know why...
The market is long overdue for a pullback. Stocks are as "overbought" as they've been in decades. And investor sentiment is downright giddy.
Today, we can add one more reason to the list... According to analysts at Bank of America Merrill Lynch, one of their firm's proprietary indicators is sending a short-term sell signal for the first time in years. As financial-news network CNBC reported this morning...
Investors poured $33.2 billion into stock-based funds through the week ended Wednesday, BofAML said in a report. That's a record both for total flows and as well as for active funds, which alone pulled in $12.2 billion. By comparison, equity funds across all classes took in a net $278 billion for all of 2017, according to Morningstar, meaning that last week alone equated to 12% of flows for the entire previous year...
While the inflows have helped push the market higher, they also can be seen as a contrary indicator when they flash signs of excess. BofAML uses a proprietary "Bull & Bear" indicator that gauges when inflows or outflows point to investors moving too far to either side.
The current reading on the indicator of 7.9 is the most bullish since a reading above 8 in March 2013 – a sell signal. Michael Hartnett, BofAML's chief investment strategist, said the Bull & Bear indicator has shown 11 previous sell signals since the firm started tracking it in 2002 and has been correct each time.
To be clear, this signal doesn't imply a crash is likely... While the 11 previous sell signals have preceded a correction of about 12% on average, some (like the one in 2013) have led to much smaller declines. In this case, the analysts expect a pullback of at least 6% in the S&P 500 Index.
Our colleague Dr. David 'Doc' Eifrig agrees...
In fact, if you joined us for our big Stansberry Portfolio Solutions event on Wednesday, you know he is currently as bearish as he has been in years. He thinks we could see a sharp decline of as much as 15% over the next several months.
But Doc doesn't recommend trying to trade around this move. He believes timing the exact top and bottom will be next to impossible. And like Steve, Doc believes it will be a correction in an ongoing bull market, rather than the start of a larger selloff. He notes larger declines and crashes typically occur during periods of economic weakness. And for now, the economy remains strong.
Instead, he recommends simply keeping some extra cash on hand to take advantage of the buying opportunities that are likely to arise. So long as you're holding a properly diversified portfolio, Doc says there's no reason to worry.
Of course, if you're not exactly sure what a 'properly diversified portfolio' entails...
We encourage you to take a little time this weekend to watch the replay of this week's event. Even if you aren't interested in trying Stansberry Portfolio Solutions, you're sure to walk away with some valuable insight.
You can view it for free right here.
New 52-week highs (as of 1/25/18): AbbVie (ABBV), American Financial (AFG), Amazon (AMZN), Alibaba (BABA), Becton Dickinson (BDX), Biogen (BIIB), Blackstone (BX), Morgan Stanley China A Share Fund (CAF), Global X China Consumer Fund (CHIQ), WisdomTree Emerging Markets High Dividend Fund (DEM), PowerShares Chinese Yuan Dim Sum Bond Fund (DSUM), iShares Select Dividend Fund (DVY), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Spain Capped Fund (EWP), iShares MSCI South Korea Capped Fund (EWY), iShares MSCI Brazil Fund (EWZ), Fidelity Select Medical Technology and Devices Portfolio Fund (FSMEX), Alphabet (GOOGL), ETFMG Prime Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), JPMorgan Chase (JPM), Coca-Cola (KO), VanEck Vectors Coal Fund (KOL), KraneShares CSI China Internet Fund (KWEB), Midas Gold (MAX.TO), Mobile TeleSystems (MBT), MercadoLibre (MELI), Microsoft (MSFT), ProShares Ultra Health Care Fund (RXL), SPDR S&P Dividend Fund (SDY), Sysco (SYY), Travelers (TRV), and Wal-Mart (WMT).
The feedback on this week's Stansberry Portfolio Solutions event is still rolling in. What did you think? Let us know at feedback@stansberryresearch.com.
"Hello Porter, I enjoyed the 2018 Portfolio Solutions webcast [Wednesday] night. I have been following/investing in The Capital Portfolio recommendations since early February, 2017. I'm delighted in the returns thus far..." – Paid-up subscriber Dave Burchfield
"Listened to entire event [on Wednesday night] and was impressed as I have been for many years as one of your subscribers... Keep up the good work." – Paid-up subscriber Larry L.
"Registered for the presentation... knew the time of event, no registration link was sent, searched and could not find the presentation link. In other words, it was a bust." – Paid-up subscriber Kent S.
Brill comment: Kent, we're sorry you weren't able to access the presentation on Wednesday. But it's not too late to watch a full video replay of the event. You can access it for free right here.
"Hi folks, could you please publish the performance of the three Portfolio Solutions portfolios and/or tell us where to find the performance info?" – Paid-up subscriber Todd T.
Brill comment: Porter, Steve, and Dr. David "Doc" Eifrig discussed the 2017 performance of all three portfolios in detail – and also covered many of the other most common questions we've received about Stansberry Portfolio Solutions – in Wednesday night's broadcast. Again, if you missed it, you can watch a free video replay here.
Regards,
Justin Brill
Baltimore, Maryland
January 26, 2018