A Major 'Get Out' Warning for Stocks
So much for the 'Trade Truce' rally… Another reason for caution… A major 'get out' warning for stocks… Don't miss 'Doc' Eifrig's big announcement tomorrow night…
Editor's note: U.S. markets are closed tomorrow in observance of a "National Day of Mourning" for former President George H.W. Bush, so we won't be publishing the Digest. We'll resume our usual publishing schedule on Thursday.
Well, that didn't take long...
Yesterday, we told you we were skeptical the "Trade Truce" rally would last long. But even we wouldn't have guessed it would peter out so soon.
This morning, stocks opened solidly in the red after several White House officials cast doubt on the recent trade agreement with China. As Bloomberg reported...
President Donald Trump's advisers are scrambling to explain a trade deal he claimed he'd struck with China to reduce tariffs on U.S. cars exported to the country – an agreement that doesn't exist on paper and still hasn't been confirmed in Beijing...
Questioned about the agreement on Monday, Treasury Secretary Steven Mnuchin and Trump's top economic adviser, Larry Kudlow, dialed back expectations and added qualifiers... "I'll call them 'commitments' at this point, which are – commitments are not necessarily a trade deal, but it's stuff that they're going to look at and presumably implement," Kudlow told reporters at an official White House briefing on Monday that followed TV interviews and informal briefings by him and Mnuchin earlier in the day...
The uncertainty underscored the risk entailed by Trump's eagerness to strike deals without nailing down details in advance. The confusion was exacerbated by the absence of a joint statement from the U.S. and China following the dinner. Financial markets were left struggling to digest talks that the White House portrayed as a major victory for the president.
Unfortunately, the sell-off only worsened as the day went on…
Both the Dow and the S&P 500 closed the day down more than 3%, while the tech-heavy Nasdaq Composite lost nearly 4%.
Worse, after briefly recapturing their 200-day moving averages during the recent rally, all three major indexes closed back below these widely-watched levels today.
But doubts about the trade deal weren't the only worries for the markets today...
Regular Digest readers know we've been tracking several important credit market indicators as "early warning" signals for stocks and the economy.
And recently, we saw the first signs of trouble in several years. As we explained in the November 20 Digest...
For the first time in nearly three years, we're now seeing the first real signs of stress in the corporate credit markets.
First, as you can see, the spread between junk bonds and U.S. Treasury bonds has surged higher. It has risen from below 2.1% in September to more than 2.8% today, officially creating a "higher high"...
More concerning, after showing relative strength in October, junk-bond prices are suddenly plunging. Not only have they turned negative for the year, they've just created a "lower low" below their November 2016 bottom...
Today, we can add another concern to the list...
Only this time, it's in the sovereign credit markets. As of yesterday, the U.S. Treasury yield curve has officially inverted for the first time in over a decade. From a separate Bloomberg report on Monday...
The spread between 3- and 5-year yields fell to negative 1.4 basis points Monday, dropping below zero for the first time since 2007, and the 2- to 5-year gap soon followed. The 2- to 10-year is more closely watched as a potential indicator of pending recessions. But Monday's move could be the first signal that the market is putting the Federal Reserve on notice...
While the yields on shorter-maturities fell on Tuesday during Asian hours, the spread between 3-, 5-year yields remained stable. Longer-maturity bonds rallied sharply, flattening the long-end of the yield curve. The U.S. 10-year slipped another 3 basis points to 2.94%, dropping below the 200-day moving average for the first time this year.
As Bloomberg noted, the most widely-followed yield curve spread – the so-called "2-10" spread – has not yet inverted. It currently sits at just above 0.11.
While this is as close to zero as it's been since the financial crisis, it's still in positive territory for now.
However, as the following chart shows, inversion in these two lesser-followed spreads suggest it's now just a matter of time before the 2-10 spread inverts too...
This would be an important development...
As longtime readers may recall, both Porter and Steve Sjuggerud consider a 2-10 inversion a serious warning sign. As Steve explained in the November 22, 2017 Digest…
Porter and I published the exact same chart on Friday. We both said it's a major "get out" warning for us...
The chart shows us that when we get an inverted yield curve, stocks peak and a recession is around the corner...
Porter says it could turn negative by early next year. I think that day happens in 2019 or even 2020. Only time will tell... But whenever it does happen, don't take it lightly. Bear markets happen a lot faster than bull markets. And great bear markets tend to follow great bull markets.
Now, let us be clear...
While this is concerning, this signal alone is no reason to panic.
First, as we've noted many times, it is not an immediate sell signal. History shows stocks have typically peaked several months to as long as two full years after the yield curve first inverts. And again, the most widely followed measure of the yield curve still has not officially inverted at this time.
In other words, according to this particular indicator, we're getting closer to the end of this long bull market, but we're still not there yet.
However, given the recent stress in the corporate credit markets, the continued warning from our proprietary Complacency Indicator, and the relatively weak price action in the broad stock market, we believe this signal warrants a little more caution than usual.
Our advice remains the same: Stay long, but stay "hedged"... and keep a close eye on your trailing stops, just in case.
One last thing...
Last week, our colleague Matt Weinschenk – senior analyst on Dr. David "Doc" Eifrig's research team – explained why he and Doc have recently become more cautious, too.
He noted that they're currently recommending subscribers stick mostly to conservative, "boring" stocks, hold some extra cash, and consider buying gold and gold royalty companies for the first time in years.
However, he failed to mention that Doc is also launching a brand-new service – called Advanced Options – that is ideally suited to the current market environment.
In short, as its name implies, this new service will teach you how to use little-known options strategies to make more money – while taking far less risk – in many of the same recommendations you're probably already buying.
Best of all, unlike many of our more advanced services, this one isn't limited to folks with large portfolios. In fact, Doc says anyone can take advantage of this strategy with as little as $100 to $200 per trade.
Doc is hosting a free event tomorrow night, Wednesday, December 5, at 8 p.m. Eastern time to officially introduce this service for the first time. Click here to learn more and to reserve your spot now.
New 52-week highs (as of 12/3/18): Essex Property Trust (ESS), Ingersoll Rand (IR), Service Corporation International (SCI), Under Armour (UA), and Walgreens Boots Alliance (WBA).
In today's mailbag, a reader is looking for our new Stock of the Week feature... and a Stansberry Alliance member is curious about Doc's new service. As always, send your notes to feedback@stansberryresearch.com.
"Where is the Stock of the Week? I can't find it, even though I am logged in." – Paid-up subscriber John T.
Brill comment: John, we publish a link to our latest Stock of the Week in the Digest each Monday. But you can always access the full archive on the Digest homepage right here.
"Hello, I am excited with the imminent launch of Advanced Options. I am an Alliance Member and already receive the 3 bonus newsletters mentioned in the promotion. Is Advanced Options included in the Alliance package? Thanks for your assistance." – Paid-up Stansberry Alliance member Steve G.
Brill comment: Of course, Steve. As promised, Alliance members receive all new services we publish – including Doc's new Advanced Options advisory – at no additional cost.
Regards,
Justin Brill
Baltimore, Maryland
December 4, 2018