An Important Reminder About the 'Melt Up'
An important reminder about the 'Melt Up'... Steve remains as bullish as ever... But you must be prepared for more volatility... This rare signal suggests the next pullback could be just around the corner...
By now, most Digest readers should be familiar with Steve Sjuggerud's 'Melt Up' thesis...
The premise is simple: History shows us that the biggest gains tend to occur at the end of major bull markets, as everyday investors abandon caution and go "all in." And for years now, Steve has told his readers that the current bull market in U.S. stocks would be no exception...
Before it was all said and done, we'd see dramatic new highs in stocks as investors became incredibly bullish again.
Today, Steve remains as confident as ever about the Melt Up...
In short, he notes most investors still aren't bullish on stocks.
In fact, as he told readers earlier this month, by some measures they recently became as bearish as they've been in years.
Despite the big rally over the last few years, this suggests the biggest gains for this long bull market are yet to come.
However, that doesn't necessarily mean stocks will soar in a straight line higher from here...
As Steve has explained many times over the past few years, Melt Ups tend to be incredibly volatile. He has often mentioned the 1990s dot-com boom as a prime example.
During the final two years of that Melt Up, the tech-heavy Nasdaq Composite Index soared more than 200%. That's a massive rally for a broad-market index, and many individual tech companies soared multiples more.
But these gains came with a "cost." As the following chart shows, the Nasdaq also suffered no less than five different corrections of roughly 10% or more over that time...
In other words, U.S. stocks could still soar dramatically from here...
But there are likely to be several sharp, stomach-churning pullbacks along the way.
We already experienced one of these last fall, when the benchmark S&P 500 Index fell nearly 20% between September and the end of the year. And if our friend Jason Goepfert – editor of the excellent SentimenTrader service – is correct, we could be approaching another.
Earlier this week, Jason noted something unusual...
As the following chart shows, the S&P 500 just hit a new all-time high on Friday...
However, three other important indexes have been underperforming.
As the next chart shows, the small-cap Russell 2000 Index, the Dow Jones Transportation Average, and the KBW Banking Index all made new lows relative to the S&P 500 within the next few days...
These indexes should sound familiar to longtime readers. They're three of the five most important "vital signs" Steve has been tracking to monitor the bull market.
When they begin to dramatically underperform the broad market, it can be an early sign that the market's "health" is starting to fail.
To be clear, these indexes are not yet sending a long-term warning about the market...
However, according to Jason's research, they could be sending one in the near term.
You see, Jason found that this combination of a new high in the S&P 500 followed by new relative lows in small caps, transports, and banks is extremely rare.
In fact, it has only happened on two other occasions in the last 40 years. And both times, the S&P 500 fell by roughly 15% within the next two months.
As always, we would never recommend making investment decisions based on any indicator alone...
But think back to how you felt during the worst of last fall's correction...
Were you losing sleep as the market was plunging in December? If so, considering taking advantage of the recent rally to raise a little cash.
History suggests we could see several more corrections like that one as the Melt Up plays out. And if Jason is correct, the next one could be just around the corner.
New 52-week highs (as of 6/26/19): Corteva (CTVA), Western Asset Emerging Markets Debt Fund (EMD), Lundin Gold (TSX: LUG), NovaGold Resources (NG), Polymetal (LSE: POLY), Royal Gold (RGLD), and Sprott (TSX: SII).
In today's mailbag: Another subscriber shares what he's currently doing with his money... and a second asks a question about foreign brokerage accounts. What's on your mind? Let us know at feedback@stansberryresearch.com.
"Out of most stocks, but certainly long on gold mining stocks and real gold." – Paid-up subscriber Clinton L.
"Hello, I read about [Doc Eifrig's Advanced Options] course with interest. I do not live in the U.S., so really wonder with whom I could open an account if I wanted to proceed." – Paid-up subscriber E.P. from South Africa
Brill comment: Unfortunately, we're not too familiar with the brokerage choices available to South Africa-based investors. However, we would assume any firm that offers both options trading and access to U.S. equities should fit the bill.
Perhaps one of your fellow subscribers could offer some suggestions?
Regards,
Justin Brill
Baltimore, Maryland
June 27, 2019
P.S. As we go to press, we just received word that Porter is finishing up the most important Friday Digest he's ever written. Be sure to tune in tomorrow...