Early Signs of a Dot-Com Bubble-Like 'Melt Up'
Wall Street briefly inches closer to reality... Expect more volatility ahead... The 'All Weather' portfolio catches on... Advice that ages well... The plight of ExxonMobil... Early signs of a dot-com bubble-like 'Melt Up'...
Wall Street is back from summer vacation...
And it looks like many institutional investors are crossing the first two (related) items off their to-do lists to start this week...
- Sell shares of the Big Tech stocks.
- Make some profits.
We're not simply speculating here...
Take it from Stansberry NewsWire editor C. Scott Garliss, who spent 20 years trading for some of the top investment banks in the country before coming to Stansberry Research.
We've seen a remarkable run in tech stocks since March's bottom. For instance, Apple (AAPL) is still up roughly 100% since March 23... even after dropping about 16% over the past week.
And as Scott wrote this morning in his regular daily commentary, Wall Street investors are incentivized to book gains today. Scott said that they would "be crazy not to take some profits off the table" right now. As he continued...
Given it's September, many Wall Street money managers and traders are focused heading into the end of the year. They want to make sure they're performing well versus their benchmarks. After all, that's how they get paid.
So if you're doing well in some positions, like technology, it never hurts to take chips off the table. And given this year holds the risk of an uncertain election outcome, why wait for the result to sell when you can do it into a rally [like we've seen since March]?
As we've said in the past, this is precisely why individual investors have a leg up on Wall Street. You're not beholden to benchmarks or just "making a good number." With your own money, you can actually make a decision in your best interest.
This, of course, resonates with us. We like to write what we see...
Today, the message is, 'Don't panic, but expect more volatility'...
We mentioned this in Friday's Digest, and we'll get into a little bit more today.
The sell-off over the past few trading days is not a full-blown Wall Street "liquidation" event like what we saw in March. Thankfully, not every asset in the world is selling off today. Circuit breakers are not firing.
We're in a recession, of course... And the knock-on effects will be with us for a while. But the stock market is forward-thinking. Economic data, some of which will probably be "bad" moving ahead, is backward-looking.
It's still "less bad" overall... So if your portfolio is geared for the long term, you shouldn't tear up your investment approach based on a few down days in the indexes.
As Scott wrote this morning, he believes we're seeing a "healthy" correction in tech stocks. And as we've written in recent weeks, these stocks make up an outsized portion of the benchmark S&P 500 Index and tech-heavy Nasdaq Composite Index. As Scott wrote...
As bad as the recent market drop may feel, pullbacks need to happen. Don't let it rattle you...
Successful investors think about where the economy and the stock market will be in the next eight to 12 months. And then, they invest for that potential.
Specifically, Scott says money managers are pricing in the potential economic effects of an approved COVID-19 vaccine (which would lower demand for remote-connectivity products). But you might want to harden your skin... This probably won't be the last spate of volatility we see in the near future.
This may be the start of a volatile two-month stretch heading into the November presidential election...
For context, Scott notes that history – along the framework of today's market environment – shows why Wall Street "profit taking" is happening as of late. As he wrote this morning...
Remember, the June-to-August stretch offers the best three-month return for the S&P 500 Index in an average calendar year. September is on average the single-worst. But if 2020 (and 2021) follow suit... even better gains may lie ahead.
Let's take a closer look...
The rally we've seen since the bottom made in March is nothing short of incredible. In an average year, an investor who put money to work at the end of May would enjoy a 3% return over the following three months. This year blew the doors off those numbers with a 15% gain.
Summer gains are usually followed by profit taking in September. The S&P 500 typically dips 1% in the month. You can see the average monthly returns in the chart below:
Scott also pointed out the best three-month run overall – not limiting it to a single calendar year – is November through January. Since 1928, those three months together have amounted to a 3.3% average gain. And Scott said...
We're not just betting on historical averages here. Other forces are driving stocks higher...
These "other forces" should be familiar to Digest readers who have been with us all summer long. Everyone is familiar with the government "juice."
"Fake money" from the Federal Reserve flooding the market... Rock-bottom interest rates... And now, the central bank has a publicly stated goal of letting inflation run higher.
It's going to be this way for years, most likely. So, yes, if you're an institutional investor, it makes sense to take profits today – when relatively safe returns are hard to come by – after a meteoric rise in Big Tech stocks.
Consider this pullback a brief dose of reality for stock prices. Very brief...
Elsewhere, people are still catching up on the bigger moving parts at work...
Take inflation fears, for example, as we've talked about for the past six months. Folks who took our advice on buying gold and silver back in April know exactly what we mean.
A relatively lower-valued U.S. dollar, driven by massive Fed printing... combined with negative "real yields," thanks to Fed and other central-bank policies... means that keeping up with or ahead of inflation, which may run higher... may take some creative "against the crowd" thinking from investors.
Just last week, we saw this headline make the rounds in the mainstream financial media...
Bridgewater's Risk-Parity Shift Jolts a $400 Billion Quant Trade
In the past, Bridgewater Associates founder Ray Dalio's famous "All Weather" portfolio has been made up of 55% U.S. bonds, 30% U.S. stocks, and 15% hard assets. But recently, it has been moving more into gold and inflation-linked bonds, diversifying the countries it invests in, and finding more stocks with stable cash flow.
With interest rates near zero and most government bonds trading below 1%, Bridgewater Co-Chief Investment Officer Bob Prince wrote in a July report that the risk didn't match the reward of the firm's traditional allocation anymore. As Prince noted...
It is pretty obvious that with interest rates near zero and being held stable by central banks, bonds can provide neither returns nor risk reduction.
But another part of this 'All Weather' portfolio shift got our attention, too...
The "finding more stocks with stable cash flow" point from Bridgewater also piqued our interest.
This is exactly what our founder Porter Stansberry dubbed the "capital efficient" approach years ago... It involves buying shares of companies with great cash flows at good prices. And now, it's seared into the minds of longtime Stansberry Research subscribers – and our editors, too.
The advice ages well, as we noted in the August 5 Digest about Porter and Retirement Millionaire editor Dr. David "Doc" Eifrig recommending tech giant Microsoft (MSFT) as long as a decade ago.
And we're seeing both ends of the story play out again today... The companies best-positioned as the COVID-19 crisis struck are thriving today, while the Federal Reserve does its best to prop up everyone else.
Among the big winners of the year are the Software as a Service ("SaaS") and cloud-related business models that are shining today as people continue to work at home.
When it comes to the SaaS universe, Stansberry Venture Value editor Bryan Beach has recently identified a few good investment opportunities. (Existing Venture Value subscribers can find Bryan's updated research on these three "hidden" SaaS right here.)
At the same time, many of the big losers this year are the companies sinking in piles of debt...
Just today, we saw news that ExxonMobil (XOM), which had been making bets on greater oil demand and expensive overseas projects, is expected to lose $48 billion through 2021. The oil supermajor has borrowed $23 billion this year alone to pay its bills.
Exxon was once the most valuable company in the world...
Two weeks ago, it was booted from the Dow Jones Industrial Average. And today, its dividend – which the company has raised for 37 straight years – may be in jeopardy of being paid out at all going forward because of how much money the company is losing.
Last year, Exxon relied on asset sales and borrowing to cover 64% of its dividend payout, according to the Institute for Energy Economics and Financial Analysis.
We can tell you that our editors held a video call earlier today in which the topic of high-quality companies again garnered the most attention – particularly finding ones that you can hold for at least a year and make profits on in a post-pandemic world...
In fairness to subscribers (plus the fact that this was a brainstorm call and the stocks discussed haven't been fully vetted), we won't get into much detail today... But during the call, we heard phrases like "cheap to free cash flow," "50% market share," "8.5% dividend that you feel is covered," and "stocks that haven't rallied yet with the market."
This is all to say that many of our editors are looking at these themes right now... particularly when it comes to long-term investors. You can expect to hear more about these ideas at our "virtual" annual Stansberry Conference during the first full week of October.
In the short term, as we said, expect more volatility ahead...
Our resident short-term traders like Ten Stock Trader editor Greg Diamond and DailyWealth Trader editors Ben Morris and Drew McConnell have come to the same conclusion recently...
They sense that we're at the beginning of a bubbly run similar to the "Melt Up" before the ultimate dot-com top back in 2000. We noted last week how our friend and Empire Financial Research founder Whitney Tilson felt the same way.
Our colleague and True Wealth editor Dr. Steve Sjuggerud popularized his "Melt Up" thesis over the last decade. And Steve said recently that he believes the fuel for another incredible asset bubble is back in place, thanks to the Fed.
This time, with unprecedented amounts of stimulus in the market, the resolution could also ultimately be worse than it was at the end of the dot-com bust. We're not there yet, but we're seeing early signs of similar price behavior. Yesterday, in his weekly outlook, Greg wrote...
The rally up in 2000 had at least four corrections that were 10% or greater. Each one did not last longer than five trading days before reversing higher!
Since the March low [this year], the Nasdaq had not recorded a correction greater than 7% – until last week.
This tells me that what happened last week is just a correction with more upside ahead.
Greg said this correction could extend for the rest of this week... or even a bit longer. However, his indicators show that "this is a correction to buy." As Greg continued yesterday...
The sharp declines like last week's wash out stop-loss levels, create fear, and then rally... It messes with bulls' and bears' mindsets.
While this rally won't look exactly the same as it did in 1999-2000, the Nasdaq is setting up for a series of corrections/rallies that will behave in a similar fashion over the course of the next few months.
What's concerning is the Federal Reserve has pumped more liquidity and stimulus into this market than ever before, which means this rally can be bigger and the subsequent crash will be much, much worse than what occurred in 2000.
So this market should concern both bulls and bears in the short-term – nasty declines like last week that wreak havoc on your portfolio and unsustainable rallies in the long-term that can lead to market crashes like 2000.
Greg's game plan in the short term is to look for spots to "buy the dip" while being fully aware of the long-term risks of a significant reckoning. In the meantime, Ben and Drew made a similar comparison in today's edition of DailyWealth Trader...
Last Thursday, we noted that the Nasdaq's "biggest pullback so far was less than 6%"... and that during the final 15 months of the Internet bubble, the Nasdaq dropped 8% or more six times on its way to a 146% gain.
We can't know for sure... But we expect this to be the first of many similar pullbacks on the way to much higher stock prices.
And in the shortest term, we don't think you'll find better context for what's happening today than this...
We said on Friday that NewsWire analyst Mark Putrino was watching the $340 level in the SPDR S&P 500 Fund (SPY) – the exchange-traded fund ("ETF") that tracks the benchmark index.
Today, the ETF closed about $7 below that number. But please, we caution making any rash decisions based on one day's performance...
These technical "levels" can vary by a few dollars in either direction. We like to think of them more along the lines of the center of a hurricane's "cone of uncertainty" range.
There's some wiggle room... and the path can change. So Mark advised earlier today to be patient to see if a bullish or bearish trend emerges around this $340 marker...
If SPY can hold above this important level over the next week or so, it will give us a major signal.
It will mean that the "conversion" has happened. That would be bullish.
When markets are rallying, levels that had previously been resistance turn into support... and that would be the case here.
Mark also showed the recent performance of the Health Care Select Sector SPDR Fund (XLV) and the Communications Services Select Sector SPDR Fund (XLC) as a sign of what could come for the broader market.
These sectors have experienced sell-offs lately, too... ahead of those of the market-carrying Big Tech names. And they have already settled into new support levels, indicating that the broader S&P 500 could do the same in the days and weeks ahead.
Stay tuned... We're sure this won't be the last time we talk about volatility.
Introducing China's 'JANT' Stocks
Brian Tycangco, the Asia-based analyst on Steve's research team, reveals why he has given China's top tech stocks a FAANG-like nickname. And more important, he explains why investors should take a closer look at these companies right now...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.
New 52-week highs (as of 9/4/20): Gravity (GRVY).
In today's mailbag, kudos for Ten Stock Trader editor Greg Diamond. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"My wife and I opened our brokerage accounts about 6 months ago with $300,000 and became Stansberry Research subscribers at the same time. Our accounts are now worth over $600,000. We recently became lifetime members of all Stansberry Research programs with our Alliance membership.
"Most of our success is a result of Greg Diamond, editor of the Ten Stock Trader program. Greg's technical analysis skills are the best I have ever seen. Greg not only makes fantastic investment recommendations, he also tells you how much to risk to protect your nest egg.
"Much of our profit has come from gold and silver stock recommendations from John Doody, editor of Gold Stock Analyst and Silver Stock Analyst. Greg Diamond's technical analysis of the gold and silver markets has helped us lock in profits at the highs of the stocks and re-enter at lower prices.
"Greg frequently stays up late at night and goes without sleep to provide the best analysis he can so we, his subscribers, can profit. There are so many different investment newsletters that will take your money, but after using Stansberry Research, we will never waste our money on second-best research.
"For anyone considering using Stansberry Research, I would recommend starting with Greg Diamond's Ten Stock Trader. After becoming Alliance members, we made the cost back in one month thanks to Greg." – Stansberry Alliance member Eddie K.
"Well done [Greg]. I owe you a bottle of fine wine. I took your warning about a market correction and sold off my portfolio over the last few days. And your call to buy VXX was perfectly timed." – Paid-up subscriber Hank S.
All the best,
Corey McLaughlin
Baltimore, Maryland
September 8, 2020