A Market Correction Is Imminent
A new 'front' in the trade war?... 'A market correction is imminent'… Our proprietary indicator is flashing again… But don't rule out a '
Yesterday, we noted that the ongoing 'trade war' with China has been heating up again...
In short, late last week, President Donald Trump unexpectedly announced that
The situation deteriorated further on Monday, following news that the Trump administration may also impose significant economic sanctions on the country for the first time. As the New York Times reported...
The Trump administration is considering sanctions against Chinese senior officials and companies to punish Beijing's detention of hundreds of thousands of ethnic Uighurs and other minority Muslims in large internment camps, according to current and former American officials.
The economic penalties would be one of the first times the Trump administration has taken action against China because of human rights violations. United States officials are also seeking to limit American sales of surveillance technology that Chinese security agencies and companies are using to monitor Uighurs throughout northwest China.
Discussions to rebuke China for its treatment of its minority Muslims have been underway for months among officials at the White House and the Treasury and State Departments. But they gained urgency two weeks ago, after members of Congress asked Secretary of State Mike Pompeo and Treasury Secretary Steven Mnuchin to impose sanctions on seven Chinese officials.
Now, we're certainly not going to defend China's appalling human rights record...
But this move would represent a dramatic – and potentially risky – change to U.S. foreign policy.
You see, the U.S. government has been critical of abuses like these for some time. However, previous administrations – including those of Presidents Bush, Clinton, Bush, and Obama – have generally avoided taking any significant action in response. The risks of permanently damaging relations – or even triggering a conflict – were simply too high.
Today, relations between the U.S. and China are already as tense as they've been in decades as the White House seeks to convince the country to lower trade barriers. But if this report is any indication, they could soon get even worse before they get better.
In the meantime, we just received an important signal for the stock market...
Longtime Digest readers may recall it was a little more than one year ago when Porter issued his first major correction warning in nearly seven years. As he wrote in the August 4, 2017 Digest...
How much longer can this [bull market] go on? No one knows. But for the first time since 2010, we're now hitting levels on our complacency indicator that suggest a market correction is imminent...
As he explained at the time, this indicator – which he and the Stansberry's Investment Advisory team developed back in 2014 – is a composite of several different gauges of market fear. And it has proven to be an incredibly powerful and accurate indicator of stock market corrections and bear markets. More from that Digest...
By studying these numbers from across dozens of different market cycles, we've discovered a key threshold level. When fear drops below this level, a correction (defined as a drop of more than 10%) or a bear market (a drop of more than 20%) has followed every single time, within 12 months.
This indicator hasn't warned about every correction. (It correctly warned about seven of the last 10.) But it hasn't produced any "false positives," either. In other words, while it doesn't spot every correction before it arrives, when it has told us that a correction is coming, the correction always does. (To be perfectly accurate, one of the resulting corrections only saw a decline of 8.4%. All of the others were in excess of 10%.)
You can see the key threshold level in the chart above. Drops in measures of fear below this level (30) always indicate a correction or bear market within 12 months. We don't know if the warning signal we're getting now means that the "big one" is imminent, or if we are only going to see a "small" correction. But we know something is coming. We know it's coming soon. And we know that there are huge excesses in the credit markets, in particular.
Of course, as we now know, the indicator would be proven right again...
It triggered in early August... and less than six months later – in late January/early February – the market plunged more than 10% as volatility exploded higher.
Why do we bring this up today?
Because yesterday, this indicator officially issued a new correction warning for just the ninth time in the past 25 years. As Stansberry's Investment Advisory senior analyst Brett Aitken explained in a note to subscribers yesterday afternoon...
We received one more warning this morning that the end of our long bull market may be in sight... One of our key proprietary indicators just flashed a major warning signal that a correction could come within the next 12 months.
As Brett reminded readers, the key number for this indicator is 30. At that level, it indicates investors as a group are too complacent, and the risk of a correction is high. And as of this week, we're now back below this critical level...
We back tested 25 years of data and found that when the score dropped below 30, it signaled a market correction of 10% or more over the following 12 months...
This month, the indicator dropped to 23. And it moves our primary indicator from "Neutral" to "Bearish."
While we consider this our primary sentiment indicator for the market as a whole, we can't know exactly when the correction will arrive. [But] based on almost 30 years of history, it will be in the next 12 months.
So what should you do with this information?
First, remember that this is not an immediate timing indicator. So, there's no reason to panic and sell your stocks today. In addition, as Brett noted, the signal could actually be a bullish sign for the near term. More from the update...
This complacency indicator could also signal the beginning of the final "Melt Up" phase of this long bull market. For the final, big move in long bull markets, investors must become extremely complacent and begin to believe the market will never correct again. That level of extremely bullish sentiment could be developing right now.
In other words, this indicator suggests we're nearly certain to see a 10%-plus correction in the next 12 months... But it also suggests we could see a huge, "blow off" top before that correction finally arrives.
Like us, Brett and the Stansberry's Investment Advisory team continue to recommend staying long stocks, while being sure to properly manage your downside risk...
We want to participate in future gains the market has to offer. So we will continue to recommend buying stocks with compelling growth stories... And we will recommend hedging your portfolio with crisis hedges, and with short positions when opportunities arise...
But now is the time to take a close look at the steps you have taken to manage your risk. In the Stansberry's Investment Advisory model portfolio, we will watch our stops.
Also, correct position sizing is critical... If any positions in your portfolio are keeping you up at night, then you may have too much exposure to that particular stock or sector. You may want to reduce the size of those positions (or close them entirely). As always, we recommend position sizes that allow you to sleep without worrying about individual stock holdings.
One last note before we sign off today...
Regular readers know there is one other step we recommend taking right now.
Assuming you're already properly managing risk in your equities portfolio, we urge you to learn more about investing in the corporate bond market.
As we've discussed many times, we believe the coming bear market will create a once-in-a-lifetime opportunity to profit from discounted corporate bonds. Savvy investors will have a chance to earn triple-digit capital gains... and collect huge, double-digit income streams... all while taking less risk than investing in stocks.
But investing in the bond market is far different than investing in stocks. If you don't know exactly what you're doing, you're unlikely to be successful.
This is exactly why we created our Stansberry's Credit Opportunities service... to give ordinary investors access to opportunities that are typically reserved only for Wall Street professionals and the wealthiest individual investors. And right now, you can try Stansberry's Credit Opportunities for yourself at the best price we've ever offered. Click here for the details.
New 52-week highs (as of 9/10/18): AllianceBernstein (AB), American Express (AXP), iShares Transportation Average Fund (IYT), Match Group (MTCH), Okta (OKTA), Roku (ROKU), SPDR S&P Dividend Fund (SDY), and Verisign (VRSN).
A busy day in the mailbag: Two readers hold opposing views on tariffs... kudos from a Stansberry's Investment Advisory subscriber... plus one Stansberry Alliance member shares his thoughts on the Theranos scandal. As always, send your notes to feedback@stansberryresearch.com.
"Regarding Chinese tariffs, no one has mentioned what the Chinese retaliatory tariffs will do to their own country. One of their major imports is
"Trump continues to follow the path of Herbert Hoover, whose tariffs turned the '29 crash into the Great Depression. At least Hoover did it constitutionally, letting Smoot and Hawley take the blame. Trump hasn't had the big market crash yet, but that is coming, maybe sooner than we think." – Paid-up subscriber Chuck B.
"You rock... GRUB, OKTA, HSY, NYT, UA [have] paid for my [Stansberry's Investment Advisory] subscription 20 times over. You've got good ideas. Thanks." – Paid-up subscriber Fabian H.
"I regained some faith in the ability of the markets to deal with bad behavior with the news of the official end of Theranos. I think an argument could be made that the securities regulatory framework worked perfectly in limiting the damage to those who should have known better and therefore protected the small retail investors that might have been sucked in. Had it been public, I would have been a short but I don't regret having lost the opportunity due to protections for retail investors. Many of my colleagues would no doubt have bet money they could not afford to lose in spite of my warnings I'm okay with that tradeoff in this case.
"The story of Theranos neatly ties together several threads of how our current social context enables a fraud such as this. Our emphasis on the role of women in technology created the opening for a substandard student with an incomplete idea to raise hundreds of millions of dollars simply by making the claim, without evidence, that she was the female version of Steve Jobs. If Theranos had been able to survive to an IPO, you can bet that it would have been the top holding of any number of ["socially responsible"] mutual funds simply because of the 'empowerment of women' angle it represented. Now we will no doubt hear a protective narrative that Ms. Holmes might have succeeded but for the misogyny of the male patriarchy and having been unduly under the influence of her male lover and co-conspirator. Meanwhile, there are a large number of incredibly brilliant and effective women in corporate America who will bear the burden of Ms. Holmes' fraud because as we well know from the affirmative action realm, tribal/identity politics cuts both ways.
"Regardless of the social circus, I was very glad to see Theranos wind down and cease to exist. There was no rescue, no legislation, no government bailout – just what appears to be a normal liquidation of a failed business. This gives me some hope that the next turn of the credit cycle might actually result in further liquidations rather than just the socialization of the bad debt – this would be a watershed change in our economy and a definite turn back towards free markets.
"I harbor no illusions that TSLA could be wound down as cleanly as Theranos, but it does give me hope that the same conditions that led to the dissolution of Theranos might lead to the re-pricing of TSLA to its real value and a subsequent sale of its I.P. to an actual manufacturer." – Paid-up Stansberry Alliance member Paul W.
Regards,
Justin Brill
Baltimore, Maryland
September 11, 2018