Don't Get Too Bearish Yet
Inflation is returning... Is Wal-Mart doomed?... Amazon expands into groceries... Don't get too bearish yet... One big reason to bet on a rally... The last time this happened, you could have doubled your money 10 different times
Price inflation is quietly moving higher again...
Yesterday, the U.S. Department of Labor said consumer prices – as tracked by the Consumer Price Index (or "CPI") – rose 0.3% in September, their biggest gain in five months. The CPI is now up 1.5% over the past 12 months, which is the strongest year-over-year increase in nearly two years.
This is still historically low... and well below the Fed's current inflation target of 2%. But there are signs prices could rise above that level as early as the next few months. As the Wall Street Journal reported...
[September's increase was] driven largely by rent and health care cost increases... Meanwhile, gasoline costs, which have been depressed for much of the past two years, are starting to rise again as oil markets rebound. As more Americans get jobs and household income rises, businesses are starting to charge more for goods and services.
"We are just beginning to see the first whiffs of upward pressure in prices as labor and product markets tighten," economist Stephen Stanley of Amherst Pierpont said in a note to clients.
As we discussed on Monday, the Fed has hinted it may raise its inflation target to as high as 3% or more, and let the economy "run hot" to encourage growth. This doesn't rule out another small rate increase in December, but it does suggest the Fed is unlikely to "tighten" significantly any time soon.
In other words, as we've predicted, worries about the end of central-bank easing are likely misguided.
Wal-Mart takes a huge gamble...
Earlier this month, retail giant Wal-Mart (WMT) announced a major change to its growth strategy.
Instead of building new "supercenter" locations as it has for decades, the company is shifting to e-commerce. As the Journal noted at the time...
At an investor meeting Thursday, executives said Wal-Mart would open only about half as many supercenters next year as it did last fiscal year. Instead, Wal-Mart will direct more of its $11 billion in annual capital spending toward boosting e-commerce sales, technology used in stores and customer service.
The decision is a fundamental shift for the world's largest retailer that will require significant investment and also weigh on profit...
"I don't think it's an exaggeration to say we are going through a transformative period," Wal-Mart CEO Doug McMillon told investors and analysts at the meeting.
Wal-Mart is the world's largest and most dominant brick-and-mortar retailer. But it has had relatively little success with e-commerce to date.
Wal-Mart reported just $14 billion – or 3% of its total revenue of $482 billion – came from online sales last year. Can it really hope to compete with e-commerce juggernaut Amazon (AMZN) and its nearly $80 billion (and growing) annual sales?
Who will shop at Wal-Mart online? Assuming prices are comparable, why would consumers choose Wal-Mart over Amazon?
We can't say... But it's certain to cost the company a fortune to find out.
Wal-Mart has already slashed its earnings forecasts out through 2019, due in large part to its recent $3.3 billion acquisition of (unprofitable) online retailer Jet.com.
Meanwhile, Amazon is showing no signs of slowing down. As we discussed in the September 29 Digest, the company has quietly become a leading clothing retailer. And last week, the Journal reported the company is planning to move deeper into the grocery business...
The Seattle company aims to build small brick-and-mortar stores that would sell produce, milk, meats and other perishable items that customers can take home, these people say. Primarily using their mobile phones or, possibly, touch screens around the store, customers could also order peanut butter, cereal and other goods with longer shelf lives for same-day delivery.
For customers seeking a quicker checkout, Amazon will soon begin rolling out designated drive-in locations where online grocery orders will be brought to the car, the people said. The company is developing license-plate reading technology to speed wait times.
Don't get too bearish yet...
As regular Digest readers know, there are plenty of reasons to be cautious today...
Stocks and bonds are expensive... Corporate earnings have been falling... The economy appears to be slowing... Companies have loaded up on record amounts of debt, just as the credit-default cycle is ramping up... And more and more of the world's most respected investors have been warning of growing risks in the market.
But in the short term, some signs suggest that the market may hold up a while longer...
For example, according to Bank of America Merrill Lynch ("BAML"), fund managers are holding an unusually large amount of cash right now. The firm's latest monthly survey showed managers are holding an average of 5.8% of their portfolios in cash, up from 5.5% in September.
This is the largest average cash position since November 2001, just after the September 11 terrorist attacks. It's even higher than it was during the peak of the 2008 financial crisis. According to Michael Hartnett, BAML's chief investment strategist, this suggests major investors have become too bearish, and a rally is likely.
Likewise, we've heard from colleagues that friends and family members are getting worried about the market – even asking if they should pull their money out of the stock market completely... suggesting "Mom and Pop" investors may be a little too bearish, too.
Of course, we would never recommend basing investment decisions on isolated indicators or anecdotes. But they can be useful in context.
The biggest reason to bet on a short-term rally today...
Our colleague Jeff Clark also expects a rally... but for a different reason.
He says that extreme oversold conditions this time of year often lead to strong year-end rallies. In fact, Jeff notes that in each of the past nine years – including during the 2008 financial crisis – U.S. stocks have experienced "violent" short-term rallies after reaching oversold extremes in October or November.
In Tuesday's edition of his Stansberry Research Pro Trader service, Jeff showed three charts that suggest this trend is likely to continue this year. First, he showed stocks have already fallen to a level where a short-term rally is likely...
The S&P 500 broke down from its consolidating-triangle pattern (the blue lines) earlier this month. And it has now hit our first downside target of about 2,122. This is a logical area at which to start looking for a bounce.
Next, he explained the Volatility Index ("VIX") – the market's so-called fear gauge – had just hit an oversold extreme... suggesting lower volatility and higher stock prices are likely...
The VIX – the stock market's fear indicator – closed above its upper Bollinger Band last Thursday. This is an extreme condition that indicates that the VIX is overbought and the broad stock market is oversold. It often marks the end of a decline phase.
On Friday, the VIX closed back inside its Bollinger Bands. This triggered a broad stock market "buy" signal.
Broad stock market buy signals occur when the VIX closes above its upper Bollinger Band and then declines back below the band. This is the eighth buy signal we've seen over the past 12 months. All of the previous buy signals led to at least a short-term bounce in the stock market.
Finally, he notes we're approaching "extremely oversold" levels on an important technical indicator – the McClellan Oscillator – for both the New York Stock Exchange and the Nasdaq...
The McClellan Oscillators are momentum-based indicators that help determine overbought and oversold conditions. Readings of more than 60 indicate extremely overbought conditions and often precede large declines in the markets. Readings below negative 60 display extremely oversold conditions and usually lead to strong bounces in stock prices.
As you can see from the charts, neither oscillator has reached the negative-60 level yet. But they're close.
Jeff says stocks could be hit with another round of selling pressure, which would push these indicators well into "extremely oversold" territory. But he thinks we're close enough to those levels that it's not a given, and that a rally could begin at any time.
While Jeff is bullish in the short term, he says a serious crisis is approaching...
Jeff predicts a significant decline – what he calls an "M Wave" – is virtually guaranteed to follow in the coming months.
The last time this happened – during the financial crisis of 2008 – most folks lost money… But Jeff's subscribers closed out 10 different trades for gains of 100% or more. And he expects they could do even better this time around.
To learn more - including how you can try Jeff's service today, absolutely risk-free and for just half the normal cost – simply click here. (Please note: This does not lead to a long video presentation.)
Introducing the new Stansberry Research homepage...
We've been working on a brand-new subscriber website, and we're pleased to report a "beta" version is finally ready. Please check it out here and be sure to let us know what you think.
New 52-week highs (as of 10/18/16): ProShares Ultra MSCI Brazil Capped Fund (UBR).
Another slow day in the mailbag... What are you hearing from friends and family? Are folks getting bearish? Let us know at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
October 19, 2016