Part of the 'Storm' Hits Early... And That's Not Entirely Bad News

The 'Delta variant' scares the market... Part of the 'storm' has arrived early – and that's not entirely bad news... A concerning trend continues... But it's not a one-way street down... Reasons to be bullish tech...

Last month, we wrote that a 'winter storm is already brewing' in the markets...

And we urged you to make sure that you saw it coming...

By that, we meant we were seeing signs that worried us about the markets in the near term, even as stock prices continued to push to all-time highs...

As our Stansberry NewsWire editor C. Scott Garliss pointed out, institutional investors had been raising cash, hoping for a pullback that they could buy on... In the meantime, retail investors were continuing to pile into stocks at a rate not seen in six years...

Add both sides up and, this time last month, stocks and bonds were trading in close "correlation" for an extended period of time – an unusual occurrence that only proceeded massive market tops at the height of the tech bubble and the great financial crisis.

That certainly got our attention.

With that in mind, I (Corey McLaughlin) wrote about a few items on the horizon that could ignite a sell-off of a market that looked jittery beneath the surface... like potential Federal-Reserve-leadership turnover around the turn of the year... or another COVID panic.

From the June 11, 2021, Digest...

We're never sure which piece of "news" is going to be the one credited with sending an already jittery market to new lows, but we do know what caused the last major sell-off we saw in March 2020...

The COVID-19 panic.

And one thing that we don't think most people, let alone investors, are considering today is the natural uptick in reported COVID-19 cases that might happen in the fall and winter... just like the seasonal flu every year.

Rational people may understand the risks of the virus at this point, and they may be able to make adult decisions just fine. But we're willing to bet if we see any rise in cases at all – at any point – the nation's collective response might very well become more irrational than not...

We don't exactly know how that would play out in stocks, but it certainly doesn't reduce any uncertainty in the markets.

Today, that part of our winter storm forecast is playing out a little earlier than we expected...

We're talking fears about a new COVID-19 "Delta variant."

Today, the benchmark S&P 500 was down 1.6%, and the Dow Jones Industrial Average was off roughly 2.0%, on news over the weekend about the growing spread of this COVID variant in the U.S. As Scott reported in the NewsWire...

The stock market narrative this morning is focused on rising Delta variant infections amongst the unvaccinated. And that's weighing on the growth outlook everywhere, causing global equity markets to drop.

According to the worldometers.info coronavirus tally, the U.S. saw more than 40,000 new infections on Friday (the data tends to have a lag). The seven-day moving average is back above 30,000 cases daily, compared to just over 12,000 in the middle of June.

As a result, there's rising concern in Washington, D.C. Surgeon General Dr. Vivek Murthy warned over the weekend that mask mandates could be reinstituted in many areas where infections are rising. The White House and the Centers for Disease Control and Prevention expressed worries about the increasing infection rate, warning of a pandemic resurgence amongst the unvaccinated population.

In other words, if you thought Independence Day marked complete freedom from all things COVID, think again...

The Delta variant, first found in India in December 2020 and reportedly responsible for many of the 400,000-plus COVID-19 deaths in that country, has become the dominant strain in the U.S. today...

It is reportedly more contagious and potentially more deadly than the original strain of the SARS-CoV-2 virus... though early indications are that existing vaccines do protect people against the most severe symptoms of COVID and could keep them out of the hospital.

So what's going to happen... Does "work at home" life go on longer than people thought (again)? What's the impact on schools? The market is starting to think about these types of questions today...

Take just one stock that we've mentioned here before... E-signature software leader DocuSign (DOCU). As NewsWire analyst Nick Koziol reported today, shares were up 3%...

The reasoning is simple. If the Delta variant does indeed force governments to reimpose restrictions, people could begin to be more conscious of social-distancing measures. That means that business may not be conducted face-to-face again.

And if that happens, people can't sign contracts in person. As a result, they'll have to turn to DOCU. We saw this play out already in 2020. DOCU added more subscribers in some quarters last year than it had in entire years before the pandemic.

In other words, it could be a worthwhile time to revisit your "COVID trades."

We're paying attention to the sell-off...

But not just for COVID reasons... and that's why we don't want anyone to panic. The way we see it, renewed fears about the virus just happen to be today's spark of a broader pullback...

We'll save the debates about masks, shutdowns, and the like for someone else... and stick to what we've been talking about for the last few weeks here...

What's been going on with stocks.

Every stock is different, but we noted that if you're worried about broad market sell-offs and want to avoid them, then you obviously want to look at indicators that show what the broader market is doing today...

And, after doing this, we wrote in the July 6, 2021, Digest to not be fooled by the major U.S. indexes continuing to hit new all-time highs. Despite the headlines, we said...

All is not well. The number of individual stocks hitting new highs each day has been decreasing as of late... Plus, an increasing number of stocks are starting to trade below their long-term averages (though that is only down slightly from a record high).

When this combination happens, it's usually an early indicator that a broader sell-off in stocks could be ahead... or at the very least, that we're closer to a top than a bottom.

The fancy term for this is "market breadth deterioration."

Specifically, we compared the performance of the stocks in the NYSE Composite – the roughly 2,800 stocks that trade on the NYSE, from blue chips to small caps – with the percentage of those same stocks that are trading above their 200-day moving averages ("200-DMA").

The 200-DMA is a good technical indicator of a long-term price trend of any asset... because 200 days equals just about 40 trading weeks, or nine months.

We wrote we recently saw a trend 'flip'...

From the July 6 Digest...

The black line shows the value of the NYSE Composite. And the blue line shows the percentage of NYSE stocks above their 200-DMAs at any point over the past two years...

... Look back at the chart to a few months ago...

Around April of this year, the NYSE Composite kept climbing to fresh highs, despite the number of stocks in long-term uptrends starting to drop to the levels from the end of 2020... albeit from the absurdly high peak of about 90%.

Relatively speaking, that means for roughly the past two months, fewer stocks have been heading higher while the headline indexes have still been hitting new highs...

This is not what you would expect to see in the strongest, healthiest bull markets.

Two weeks later, the trend has continued...

The number of NYSE stocks trading above their 200-DMA has continued to slide... from just above 80% to around 76% today...

That means since July 6, about 100 more stocks (4% of 2,800 in the NYSE) have dipped below a key indicator of their long-term trend...

But here's the thing... This doesn't mean you should panic and go sell all of your stocks today...

Amid this morning's sell-off, DailyWealth Trader editors Ben Morris and Drew McConnell addressed the question likely on many investors' minds today. From today's issue...

Is this the start of a big drop? Or is it just another dip that feels bad for a few days?

At this point, we can't know...

But they could say they were pleased by being disciplined with their trades, as always, which is within the control of every single investor.

By that, we mean this: If you've determined how much risk you want to take on a particular position (our recommendation), you already know what your sell levels are... and where you want to take profits...

For example, DailyWealth Trader is more focused on the short term in nature. Last week, Ben and Drew closed a pair of trades for gains of about 115% and 72%... If the market continues to fall, they may take losses on other positions.

But as Ben and Drew wrote today...

If this is just another dip, though, most of the portfolio will cruise through with no problem.

The thing is, whichever way it goes, our trading plans are already in place. And our best move today is to simply stick with them...

In some cases, that means paying attention to our stop losses and exiting any positions that trigger those stops.

This provides a great example of what risk management is.

As longtime investors know, sell-offs can actually present opportunities...

As we pointed out, this isn't exactly the "winter storm" we originally described happening toward the end of the year...

It just might be a piece of it... And if you're a believer in using history as any indication, this idea makes sense.

We looked back at previous 200-DMA performance the few times when 90% of stocks topped their 200-DMAs for an extended period of time, and then "came back down to Earth," like they might be behaving today... We see the scenario happened twice over the last 20 years...

In 2004 and early 2010. During each of these periods, the NYSE Composite – remember, all of the stocks that trade on the exchange – fell roughly 5% and 16%, respectively, from peak to bottom...

It's hard to say if this will be a single-digit or double-digit pullback at this point... Neither would surprise us... After all, you know that during a "Melt Up," double-digit corrections are part of the blueprint to the ultimate euphoric top in stocks...

And, as we write today, the NYSE Composite has already sold off roughly 4% since its most recent high last Monday, July 12... and the Dow is off more than 3% since last Thursday, and the S&P 500 and tech-heavy Nasdaq Composite Indexes are down about the same from their recent highs...

But it's not a one-way street down for all stocks today either...

As we said, some stocks like DocuSign were actually up... That, and some other signs, suggest this might be a short-lived broader pullback...

Using more history and time indicators that go back much further, our Ten Stock Trader editor Greg Diamond, sees bullish signs for one sector today... tech.

Regular readers know Greg has been tracking a lot of similarities between the Nasdaq today and the Nasdaq in the lead up to the dot-com bubble peak more than 20 years ago... when it gained about 350%.

As Greg wrote in his Weekly Market Outlook this morning, this comparison still holds and suggests the Nasdaq is likely in the early stages of a big breakout higher...

Despite some back and forth earlier this year, the Nasdaq 100 and tech stocks have been following the same path as they did back then.

Here it is again...

The blue line is the start of the rally in 1998 to the high in early 2000. The green line is the start of the rally from March 2020 to now. You can see how tight the correlation is, and how recently the Nasdaq broke out above resistance (red lines) – just like it did nearly 20 years ago.

This breakout will be support if it's tested at all. I will stick with this breakout and time cycle until the current market environment proves me wrong.

To track what's going on in tech a little more closely, Greg is watching several semiconductor stocks, including the VanEck Vectors Semiconductor Fund (SMH) and a few others.

Here's the technical chart of SMH that Greg shared this morning... You'll see shares have pulled back recently but haven't fallen below that key 200-DMA level yet...

In the end, if we had to make an educated guess, renewed COVID fears are going to be all over the headlines for the next few days, perhaps weeks... and there will be intense debate over vaccines like there has been for over a year... and some companies might need to rethink their "back to work" plans.

But the good thing about the stock market is that – once the playing field and money supply is set, of course – that it will take all of that into account. The market usually gets the direction right at least... but by how much is a different story.

Today, Mr. Market is saying, "Pump the brakes on that reopening for now." That's not an unreasonable request. Because on days like today, we like to remember that it might be even more concerning if stocks rose in the face of the same news.

Gordon Gekko Is Wrong – Why Greed Is Not Good

CBC Dragons' Den star and self-made multimillionaire Arlene Dickinson gets personal with our editor-at-large Daniela Cambone about her road to success and her failures along the way. An avid philanthropist, Dickinson also shares her theory on why greed is not a cornerstone of capitalism... and why it eventually backfires in the end...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 7/16/21): American Homes 4 Rent (AMH), American Tower (AMT), AutoZone (AZO), Brown & Brown (BRO), Crown Castle (CCI), Hershey (HSY), Novo Nordisk (NVO), ResMed (RMD), and Waste Management (WM).

In today's mailbag, feedback on Dan Ferris' latest Friday Digest... Do you have a comment or question? As always, send your notes to feedback@stansberryresearch.com.

"I liked your 7/16 Digest that mentioned "401K is a scam." I encountered this early in my working life from people working at low-end jobs (and back then they were better deals). They didn't know why it was a scam, but just said it and were afraid of them. You debunked many of the things they are probably thinking. However, today, some are a scam.

"For two of my kids I asked them if they had 401K's at work and did they sign up for them. They weren't sure what to do, so we looked over the information:

"No or extremely low company match. Funds with either high fees or an AUM fee in the 50 to 100 basis point range.

"I consider both of their 401Ks scams. No free money and having to pay fees make it worse than investing on your own. Usually, there is at least one fund that is a low-cost index fund. But if there is an AUM fee, that seems like going backwards and can eat up all that company match. You could do better in a low-cost taxable brokerage firm, especially if investing in equities and being able to use long term capital gains tax rates instead of having to pay full tax rates upon withdraw from a 401K." – Paid-up subscriber Mark P.

"The 401K may be a scam. I've seen the ads saying, 'The government is going to seize your 401K!' Well, if they can do that, I am pretty sure they can also take my primary brokerage account. I wasn't aware I might not be able to pull all my money out if I was willing to pay all the tax and penalty; not that I ever would short of being unemployed.

"I remember trying to explain to a fellow employee who was contributing nothing to their 401K why they were leaving money on the table (a 100% return to start leaves a lot of room for things to go wrong... just put it in the money market if you must!) and persuaded them to take three quarters of the available match.

"I'm retired now. Until late in my 25-year career, I only contributed what the company matched (and my corporate match was 100%). Late in my career, I exceeded the match but that was because I was aggressively trying to reduce taxable income that was moving higher. I only contributed what the company matched because I wanted flexibility to handle losing a job or other misfortune without IRS penalties. At retirement I turned my 401K into an IRA and now use it for high income REITs, ETFs, etc. to generate income and without triggering higher taxes.

"I turn 59 in November and soon will be able to withdraw without penalty. Thing is I am not planning to withdraw until 70 or whatever age the government is dictating I have to start taking minimum withdrawals." – Paid-up subscriber Kenneth L.

"Right on with your assessment of the fossil fuel industry. And right on with our comparison to other well-intentioned government interventions in the markets resulting in 'unintended consequences.' Maybe some sane heads will recognize nuclear power as one of the solutions whose consequences are well known, and ever exaggerated by the media and 'greens.'" – Paid-up subscriber Caster D.

"I won't debate your thesis that the fossil fuel industry could be a great investment. I am aware that the transition from gasoline to EV will actually increase the carbon footprint if those batteries are recharged from a fossil fuel power plant. All the impeccable financial logic being said, all the reasons why wind and solar won't get us there, the 800 lb gorilla is still staring at you. Continued use of fossil fuels at current levels will lead to a collapse of civilization by the end of the century.

"Space does not permit presenting all the evidence here. The Greenland ice sheet is melting at about 6 times the rate forecast 30 years ago. That's good for about 10 ft. rise in sea level. When just a few weeks ago BC hit 118 deg, Oregon and Wash. state 110 plus deg. temperatures, not to mention the wildfires and epic drought, could we say that climate change is just getting warmed up, excuse the pun!" – Paid-up subscriber Donald G.

All the best,

Corey McLaughlin
Baltimore, Maryland
July 19, 2021