Checking In on the 'Melt Up'

Checking in on the 'Melt Up'... Why Steve Sjuggerud remains as bullish as ever... Don't dismiss this warning... Why the next correction could be just around the corner...

By now, regular Digest readers should be familiar with our colleague Steve Sjuggerud's 'Melt Up' thesis...

It's his long-held belief that the current record-setting bull market in stocks would end with a "bang" rather than a "whimper."

For the past several years, Steve has predicted that individual investors would eventually go "all in" on stocks again... and this would push prices to unbelievable new highs in the process.

However, Steve has also made it crystal clear that the Melt Up would not be a one-way move higher... In fact, based on history, he believed the market could experience several gut-wrenching moves down as the Melt Up played out. As he explained almost two years ago in the February 5, 2018 issue of our free DailyWealth e-letter...

During the last great Melt Up in stocks – the dot-com boom of the late 1990s – the Nasdaq Composite Index actually saw five roughly 10% declines during its final push higher.

Take a look...

These falls were quick. They all happened in a month or less.

But don't think they weren't painful... A 10% fall in the broad index definitely meant larger declines in the more volatile stocks. During the worst of those corrections, you had to question if staying on board was the right move.

Steve's message was simple: If you're investing in the Melt Up, you absolutely must be prepared for volatility.

This warning likely surprised many folks at the time...

If you were with us back then, you may recall the market had been on a remarkable winning streak. In the 24 months since February 2016, U.S. stocks had rallied more than 40% without so much as a 5% decline. And we set a number of records in the process...

At one point in August 2017, the benchmark S&P 500 Index closed less than 0.3% higher or lower for 12 straight days. According to Deutsche Bank analysts, it was the least volatile the market had been since at least 1927.

A couple months later, in October 2017, we noted stocks had closed at a record daily high for seven straight days... closed at a record weekly high for seven straight weeks... and closed at a record monthly high for seven straight months.

This feat had never happened before in history.

However, Steve's timing was prescient...

By the morning of his update in early February 2018, stocks had gone a record 314 straight days without a 3% intraday decline. This trounced the previous record of 241 days, set in 1996.

But the streak would end that day...

You see, that was the day of the 2018 "volatility panic." The S&P 500 plunged 4.1% in a single session as the Chicago Board Options Exchange's ("CBOE") Volatility Index ("VIX") soared more than 115%. The broad market went on to fall more than 10% from its late-January record high before bottoming.

And just as Steve predicted, volatility has reared its head several more times since...

After reaching new highs last summer, the S&P 500 dropped nearly 20% last fall. And while it rebounded more than 30% to new highs this year, the rally has been punctuated by two more sharp pullbacks of roughly 7% and 6% in May and August, respectively. You can see what we mean in the following chart...

Today, Steve remains as confident about the Melt Up as ever...

All three major U.S. market indexes have been hitting new highs recently. And as Steve explained in an update to his True Wealth Systems subscribers earlier this month, none of the market's longer-term "vital signs" are signaling serious trouble at this time...

We all know the scary headlines. They've been beaten into us lately.

Fears of a slowing economy, unpredictable trade-war talks, and a possible recession are all throwing the big picture into question. But does that mean you should panic and sell today?

You already know my answer, and the answer from the TWS computers... Heck no!

Still, if you're wondering why I'm so confident, it's simple. The five indicators we're using to track the market's overall health continue to tell the same story. This bull market is getting old... but it's not dead yet.

These indicators all flashed warning signs together before the 2000 and 2007 bull market peaks. And that's what we're waiting for before we get scared this time around...

In short, we aren't seeing the glaring sell signal from our five indicators.

This is great news... It suggests this long bull market still has further to run.

But we'll also remind you that Steve's earlier warning still applies as well... We could experience several potentially-gut-wrenching corrections in the months ahead.

In fact, history says we should expect them.

Why do we bring this up today?

Because the next one could be just around the corner...

You see, while Steve's longer-term indicators remain healthy today, several shorter-term indicators we follow are warning of trouble ahead. For example, some notable sentiment measures suggest investors are getting extremely complacent again...

One is the CBOE put/call ratio.

This indicator compares how many put options investors are buying with how many call options they're buying. And like other sentiment indicators, it's contrarian in nature...

When folks are piling into put options (bearish bets) relative to call options (bullish bets), the CBOE's put/call ratio jumps higher. This tends to be a bullish short-term sign for the market. It signals the "crowd" is too bearish... and at least a short-term rally is likely.

Likewise, when folks are piling into call options relative to put options, the CBOE's put/call ratio drops lower. This tends to be a bearish sign. It suggests the crowd has gone "all in"... and at least a short-term pullback is likely.

Because this indicator can be extremely volatile, you'll often see it presented alongside a short-term moving average to help "smooth" out its moves.

As you can see below, the CBOE put/call ratio fell to just 0.65 earlier this month...

This is the ratio's lowest extreme since January 23, 2018... again, less than two weeks before the S&P 500 plunged more than 10% in February.

On a 10-day basis, the put/call ratio fell to 0.85. While this is shy of its January 2018 levels, it matches the extremes that preceded the corrections in May and August of this year.

The CBOE's put/call ratio isn't the only sign markets are getting a little 'frothy' again today...

Market-research firm Investors Intelligence reported that its proprietary measure of newsletter-writer sentiment rose above 57% bulls last week.

According to the firm, readings above 55% suggest a short-term peak is forming. And like the 10-day put/call ratio we mentioned above, similar extremes preceded both of the sharp corrections we've seen so far this year.

Data suggest individual investors are getting more bullish, too...

In fact, according to the American Association of Individual Investors ("AAII") Investor Sentiment Survey, they're as positive on stocks as they've been in more than a year. As Stansberry NewsWire editor C. Scott Garliss noted on Friday...

AAII's survey is top-notch. The group has more than 2 million users, so the survey is a good sampling of what the "herd" is thinking. The poll asks investors where they think the stock market is headed over the next six months...

[Last week] marks the first time since the weeks of August 29 and September 5, 2018, that [bullish sentiment] was above 40% for back-to-back weeks and it's the fourth consecutive week of bearish sentiment remaining below the historical average.

Remember, we like to take a contrarian view of investor sentiment polls. When polls show that most people are scared you should be optimistic and when they indicate an excess of optimism you should be scared. Outsized gains tend to be made in extreme scenarios when you go against the crowd.

Again, these aren't "off the charts" sentiment extremes that suggest a major top is forming. But similar extremes have often preceded corrections in the past.

In that same dispatch, Scott also mentioned that professional fund managers appear to be leaning bullish as well. According to Bank of America Merrill Lynch's latest global fund manager survey, money managers are holding just 4.2% in cash today. That's down from 5% last month... and below the 10-year average of 4.5%.

Finally, we'll note that the 'short vol' trade has become incredibly popular again...

In a move that is eerily reminiscent to the run up to 2018's volatility panic, traders are once again making a historic bet that stock market volatility will remain low.

According to the government's weekly Commitments of Traders ("COT") report, large speculators were net short an all-time record 206,000 VIX futures contracts earlier this month. As longtime readers may recall, this group is sometimes called the "dumb money" because they tend to be wrong at extremes.

Like other sentiment measures, COT extremes are not a precise market-timing signal... These extremes can always become more excessive before they finally reverse. But in addition to the January 2018 decline that we mentioned earlier, similar extremes preceded the broad market corrections this spring and last fall.

Given this combination of sentiment signals...

It's little surprise that news network CNN's so-called "Fear & Greed Index" has suddenly surged higher.

This index uses the put/call ratio, market volatility, and a handful of other measures to compute a score between 0 and 100. Levels below 50 indicate some degree of fear, while levels above 50 indicate greed.

As of Friday's close, the index had risen to 87, well into "extreme greed" territory. This is up from 50 – or "neutral" – just one month ago. And it's nearly a mirror image of this time last year, when the index sat at just 10... deep in "extreme fear" territory.

And of course, we'll remind you about our own proprietary Stansberry Complacency Indicator...

It's still sending a bearish signal today, as well.

As longtime readers know, this indicator has a remarkable track record over the past 25 years. A complacency score of less than 30 has correctly predicted a decline of 10% or more in nine out of the past 11 broad market corrections – including the most recent decline of 19.8% last fall.

More important, while this indicator has not predicted every major sell-off, it has had no false positives. Of the nine times this indicator has triggered, only one instance led to a correction of less than 10% within 12 months. And that time still corresponded with an 8.4% decline.

In other words, over the past several decades, whenever our Complacency Indicator has fired, a stock market correction has always followed. And despite the big rally in stocks this year, this indicator says investors are still dangerously complacent today. As the Stansberry's Investment Advisory team explained in their November update of the Complacency Indicator...

Since hitting its most recent low on December 24, 2018, the benchmark S&P 500 Index is up about 29%, reaching a new all-time high.

But our Complacency Indicator continues to warn us that a correction may be ahead... This month, it reads 29. That's up from 16 last month. And in May it read six, its lowest-ever reading.

The indicator has given us a complacency score of less than 30 during every month since the start of August last year. This is extremely bearish.

Again, none of this is a reason to turn bearish and sell all your stocks today...

As we noted before, Steve Sjuggerud's long-term indicators say this bull market still has further to run. Any corrections in the weeks ahead are likely to be retraced relatively quickly, just like we've seen over the past several years.

If you've followed our advice on proper asset allocation and position sizing – and are already holding some extra cash, gold, and maybe a few short sales – you can sit tight. There's no need to do anything right now.

However, if you're holding a large percentage of your portfolio in speculative stocks today... particularly if you're among those who were kicking themselves during last fall's sharp decline... considering taking some profits and raising a little cash today.

You'll sleep better... and you'll be able to take advantage of any bargains that might arise.

What You Want to Know About Cryptos...
But Are Too Embarrassed to Ask

We're continuing our series on cryptocurrencies...

As we explained last week, Crypto Capital editor Eric Wade and analyst Fred Marion are answering several common questions about the space. Last Thursday, they began with the first two questions most folks ask about cryptos. In Friday's Digest, Eric and Fred explained why investing in bitcoin is just scratching the surface of the potential gains you could see.

Today, they're diving deeper into why everyday investors should consider putting money to work in the space... as well as the simple steps to take to get started with buying cryptos.

On Wednesday night at 8 p.m. Eastern time, Eric will join three-time presidential candidate Dr. Ron Paul for a massive crypto event. During this FREE online event, Eric will detail a radical new crypto that could soon disrupt the biggest companies in America... and transform the way you shop, eat, interact online, and more. Save your spot right here.

Let's get started...

What's a "token"? Is that the same thing as a crypto?

We use the word "crypto" like equity investors often use the word "stock"...

When referring to stocks, most people mean the common shares of a company. But they could also be talking about preferred shares or other restricted classes of stock. Not to mention, common stocks break down into specific types like "blue chips" and "penny stocks." And they could also be referring to various stock funds and stock options.

Essentially, "crypto" is a catchall phrase like that. When you hear the term, it could be referring to specific coins or tokens... or even the entire cryptocurrency industry.

There is no widely accepted distinction between cryptos, tokens, or coins. But in general, coins are currency-like instruments... like bitcoin, which is mostly used for online payments. On the other hand, tokens – sometimes called "utility tokens" – often have specific uses.

A subway token is a great analogy. You pay for a subway token in dollars. Then, as long as you have the token, you're always entitled to a ride on the subway.

Utility tokens can give users the ability to rent computing power... vote on a committee... make a prediction in a betting market... or even book a flight on a private jet.

Does it make sense for an ordinary person like me to invest in cryptos? Why isn't it just for tech junkies or people looking to get rich quick?

Absolutely, it makes sense for you to invest in cryptos for two main reasons...

First, beyond the scarcity and low inflation we've talked about in the Digest in recent days, bitcoin has created an industry of digital goods and services that can't be copied or faked.

Decades ago, before the Internet took off, people had to train their minds to accept that digital goods could be copied a million times... and that every copy was as good as the original.

Now, in the coming years, that's all going to change... thanks to cryptos.

The blockchain allows us to create unique assets... one-of-a-kind digital objects that can't be faked or duplicated. That's obviously important for online currencies, but it also means we'll soon be buying and selling one-of-a-kind digital objects in video games, online art... potentially even anonymized data from things like our smart watches and web browsers.

Investing early in cryptos gives you the best opportunities to capture the biggest gains as more and more industries learn how to take advantage of them and the blockchain.

But that isn't the only reason it makes sense for you to invest in cryptos... You see, you should also consider owning some cryptos purely for their speculative value.

Bitcoin was the best-performing asset in the world over the past decade... by more than eight times. This chart from research firm SpringTide Partners highlights the disparity...

And yet, bitcoin's market cap is still only about $150 billion today. Dozens of individual U.S.-listed stocks are worth more than that.

In our view, crypto's impact on the world will be as profound as the Internet's. But while the Internet digitized information, crypto is digitizing value...

Today, you don't actually own the digital dollars you can view in your bank account. They're just entries in the bank's database. If you face certain criminal charges, for instance, the bank can seize those funds before you go to trial.

But when you hold bitcoin in a crypto wallet that you control, you actually own it... No one can take it from you without your "private key" (a string of characters and numbers that's essentially your password).

That will impact all the world's currencies, stocks, and bonds. It will also create new forms of value that we can't even conceive in our minds yet.

We believe everyone should have at least a small position of their overall portfolios in cryptos. If bitcoin achieves its vision in the coming years, the industry's market cap will one day be in the tens of trillions... And each bitcoin could be worth more than $1 million.

How do I buy cryptos? Is it complicated? Will I need to take any convoluted steps? Can I do it through my regular broker?

Buying mainstream cryptos – like bitcoin and Ethereum – is easier today than ever before...

First, you need to create an account with a crypto "gateway" – a place that sells crypto in exchange for fiat currencies – and pay for your purchase with a debit card or bank transfer.

The account-creation process is about the same as setting up an online bank account... In some cases, you may need to provide your Social Security number and a picture of your ID.

Once you own the bitcoin or Ethereum, you can simply store it on the gateway (or exchange). However, we strongly recommend you transfer it to a crypto wallet that only you can access. By doing that, it ensures that you – and only you – can access your funds.

It's worth noting that different wallets exist for different cryptos. That's where it can get a little confusing, but Blockchain.com offers an easy-to-use solution for most major cryptos.

Acquiring smaller, more speculative cryptos may require setting up accounts on two different exchanges and transferring crypto between them. That's because many of these smaller tokens trade on small exchanges that may not offer the ability to buy crypto with fiat currencies like U.S. dollars. So you'll need to buy bitcoin or Ethereum elsewhere, then transfer it to the specific crypto exchange where you can trade it for your desired token.

In Crypto Capital, we always share our preferred exchanges and crypto storage methods with our subscribers for every recommendation we make. It's a critical part of our research.

A lot of folks like to start with a tiny amount of money invested in cryptos... just $50 or $100, for example, so they can get comfortable with the process. That's good advice...

Investing in cryptos – like any speculative investment – involves a small learning curve. That's why a lot of people avoid the space entirely... But by deliberately sitting on the sideline, they'll miss one of the greatest investment opportunities in generations.

Will I pay for my groceries in bitcoin one day?

If not you, someone else will.

The Intercontinental Exchange – the operators of the New York Stock Exchange – recently launched a crypto-focused start-up called Bakkt... It's a bitcoin futures exchange and digital-assets platform.

And Bakkt has announced plans to roll out a crypto payments network, likely in the first half of next year. Coffee giant Starbucks (SBUX) plans to serve as the flagship merchant.

Other apps already allow you to spend your bitcoin in stores by converting them to U.S. dollars at the time of your purchase. So while we can't speak for how you will personally buy what you need in the future, using bitcoin for purchases is becoming more accepted.

Don't forget our special event this Wednesday night...

We hope you'll join us as Eric and Dr. Ron Paul discuss what's coming in the crypto space. Eric will explain why we could see a bigger crypto boom in 2020 than we've ever seen. And best of all, it's FREE to attend. We just ask that you sign up ahead of time right here.

New 52-week highs (as of 11/15/19): Bausch Health (BHC), CBRE Group (CBRE), SPDR Euro STOXX 50 Fund (FEZ), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Alphabet (GOOGL), Huntington Ingalls (HII), iShares U.S. Aerospace and Defense Fund (ITA), Medtronic (MDT), Microsoft (MSFT), O'Reilly Automotive (ORLY), Flutter Entertainment (PDYPY), Rockwell Automation (ROK), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), Sysco (SYY), AT&T (T), ProShares Ultra Semiconductors Fund (USD), ProShares Ultra Financials Fund (UYG), and Vanguard S&P 500 Fund (VOO).

Have you followed Steve's advice for the Melt Up? We'd love to hear how you've allocated your portfolio. Drop us a line at feedback@stansberryresearch.com.

Regards,

Justin Brill
Baltimore, Maryland
November 18, 2019