A Major Shift Is Coming to Stocks
Marc Chaikin: Don't be scared... A rare indicator just triggered... A major shift is coming to stocks... More about yields... Revisiting 'the bottom is (probably) in' indicators... It may be – especially if this happens...
'You shouldn't be scared right now'...
Regular Digest readers know all about our friend and Wall Street legend Marc Chaikin. He's the founder of our corporate affiliate Chaikin Analytics.
Last night, Marc invoked some of the legendary Warren Buffett's famous advice as he addressed tens of thousands of viewers who tuned in to his latest market briefing. Specifically, he said...
Be fearful when others are greedy, and greedy when others are fearful.
In Marc's estimation – even amid the recent bank panic (which he predicted four months ago, by the way) – now is not a time to be scared to invest in U.S. stocks. In fact, Marc believes folks should be doing the exact opposite, as the Buffett quote suggests.
Marc, a 50-year investing veteran and pioneer, explained that one of the indicators he trusts the most to time the markets just triggered. And it's a rare but notable event that suggests a big shift ahead for the stock market.
The last time Marc saw this signal was at the bottom of the COVID-19 panic in spring 2020. That was just before the benchmark S&P 500 Index soared 57%.
The time before that was 15 years ago. That was just before stocks began what became their longest bull run ever.
And the time before that was in 1991 before another long uptrend. You get the picture.
As Marc told viewers last night...
This is it. The moment has finally arrived.
Marc said he wouldn't be surprised to see gains of 20% or more in the S&P 500 over the next 12 months, though – importantly – not without volatility and pullbacks along the way.
Importantly, Marc has a strategy to take advantage. It's one that he first learned back in the 1970s when, the last time inflation was as high as it is today – and volatility was as strong, too.
If you missed last night's event, click here to watch the replay right now.
Marc also shared a free trade recommendation with everyone who tuned in. It uses the strategy he says is perfect for what he calls today's "lingering bear market."
Marc also offered Stansberry Research viewers a special deal to try his research. And as part of the deal, he put together a report designed just for Stansberry Research subscribers featuring his five favorite open recommendations from our editors and analysts right now.
Don't miss it.
Moving on, let's continue yesterday's discussion...
As we shared in yesterday's Digest, our colleague and Stansberry Research senior analyst Brett Eversole recently pointed out that the recent crash in short-term U.S. Treasury yields could be a sign that interest rates are at or near a peak. And I mentioned that we would explore what that meant in the context of the entire yield curve today.
So here we go...
Regular readers may remember that the inverted yield curve reverting to normal was one of the key indicators I was tracking in my "bottom is (probably) in" list that I started sharing in the second half of 2022.
In short, I said I wouldn't be comfortable saying a "bottom" for stocks is in until short-term yields started to fall relative to longer-term yields. I won't rehash all the details about why, though you can read them in the October 6, 2022 Digest, for example.
One of two remaining holdouts on my list was the yield curve starting to get back to what it looks like during "good times." And the recent action in the Treasury market – should it continue – will check that one off...
Below is an updated chart of the "yield spread" between 10- and two-year Treasurys – a good benchmark to follow. The recent slide in the two-year yield has started to normalize its relationship to the 10-year yield (and other longer-term yields)...
This is significant – and more so if the trend continues.
We'll want to see this spread keep breaking toward positive territory. And it will need to stay above its previous peak around negative 0.4% before we make any proclamations about a new trend.
But it's certainly worth watching over the next few days, weeks, and months. And if it plays out, it could help us put the trends we've been tracking since the start of this bear market in the rearview mirror.
While we're on the subject, let's quickly review the other four 'bottom is (probably) in' indicators...
The first is "market breadth," which remains OK.
Breadth is a fancy way of saying the number of stocks in long-term uptrends versus downtrends. You can measure it a few different ways – and here's one I like...
The percentage of S&P 500 stocks trading above their 200-day moving average (200-DMA) is a simple measure of a long-term trend. And today, it's around 50%.
That's slightly below what it has been recently. But it's much higher than its 10% to 20% range since October – which could end up being the low of the bear market.
Second, the U.S. Dollar Index ("DXY") – even after a recent rally – is still trading below its 200-DMA and 50-day moving average (50-DMA), which is a measure of the shorter-term trend.
To me, this means the "strong dollar" trend – driven by the Federal Reserve's interest-rate hikes relative to what other central banks have been doing to fight inflation – is behind us. The story isn't over, but the strong-dollar headwind isn't nearly as strong as it was in the second half of 2021 and last year.
The third indicator is the simplest to track...
The S&P 500 has been trading above its 200-DMA for much of the year. And as of today, it broke just above its 50-DMA.
It's not in a rip-roaring bullish trend. But the index reclaimed its long-term average after falling below it amid the panic surrounding this month's bank crisis.
That's significant behavior to me.
That brings us back to the yield curve we just talked about...
While yields are inherently reflective of bond market behavior, they're trending in a bullish direction for stocks. That's based on our analysis that stocks peaked in January 2022 before the curve inverted two months later.
And the opposite may happen – stocks bottoming before short-term and long-term yields reverted – in a broader bottom for stocks.
Most of the time over the past several decades, stocks peaked after a yield-curve inversion. But one other time, stocks peaked before the first inversion – and it's similar to today. As I wrote last July...
That just so happened to be the last time inflation was as high and rising significantly as it is now... This year, stocks peaked in January. The yield curve inverted for the first time in March, the same two-month gap as that outlier in 1973.
If the current action in the bond market continues, it would be a strong signal that the worst is likely behind us for stocks. If not though, stay alert for more trouble ahead.
And you'll want to look at other indicators at that point to get a good read on the climate.
My final "bottom is (probably) in" indicator had to do with the market's valuation relative to past and future earnings expectations. In the past, that one was more of a confirmation of the other four indicators – and the least important in my view.
And today, that's exactly what's happening...
The S&P 500 – as measured by the current price-to-earnings ratio of the trailing 12 months (around 18) – is in line with its 12-month forward expectations. That surprised me because of the recent run-up in tech stocks.
But while the small-cap-focused Russell 2000 Index is a bit overvalued relative to the future earnings expectations of Wall Street analysts, the S&P 500 is not. In fact, it's right on point.
So all in all...
For the first time since I started tracking these indicators, I'm comfortable saying that the bottom is probably in.
We'll want to keep tracking yields in the Treasury market. But if recent behavior continues, that's a good sign for the economy and stocks...
Now, this assessment doesn't mean you necessarily need to (or should) go "all in" on stocks right now.
As always, weigh your goals and the risks and rewards of your investments. Then, act accordingly.
But as Marc said in his presentation last night, you don't need to be scared right now. Again, he has a strategy to trade what he believes could be a volatile, but upward-trending path for stocks in the months ahead.
And if you see a good buying opportunity, like from our editors and analysts – particularly on shares of high-quality businesses that you love and have growth prospects in any market environment (high inflation, lower inflation, recession, etc.) – it could be a great time to buy.
'As the Fed Goes, So Go Stocks'
The latest episode of Making Money With Matt McCall is all about the Federal Reserve. Matt dives into the central bank's latest rate-hike decision and examines how other government figures reacted to the news...
Click here to watch or listen to this episode right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 3/28/23): Alamos Gold (AGI), Aya Gold & Silver (AYASF), SPDR Bloomberg 1-3 Month T-Bill Fund (BIL), CBOE Global Markets (CBOE), Copart (CPRT), Hershey (HSY), Novo Nordisk (NVO), iShares 0-3 Month Treasury Bond Fund (SGOV), and Torex Gold Resources (TORXF).
In today's mailbag, feedback on the last time the Fed fought inflation five decades ago... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Perhaps a lot of readers do not remember the 70s. Inflation was high, then low, then high due to an unsteady Fed policy. Inflation will subside with interest rate increases, but when the rates are not raised adequately and held long enough inflation returns when rates are lowered as the demand part of the equation does not go away. I have a feeling that is what will happen now if the Fed pivots too early with rates that are not high enough. Getting the inflation rate lowered is not a simple 10-month rate hike process.
"Another issue is that a hot stock market does not include all citizens. So, taxes plus interest rates plus inflation destroys the lower income class and those same factors kill the retired. I lived through the 70s and just retired at 75 this year. I'm not looking at losing my retirement savings to inflation plus taxes. Remember that inflation is compounding so 9.5% last year plus 6% this year plus next year and pretty soon there is nothing left to live on. I'll take the pain over a sinusoidal inflation curve that keeps kicking the can down the road." – Stansberry Alliance member Dustin S.
All the best,
Corey McLaughlin
Baltimore, Maryland
March 29, 2023