Should You Listen to the 'Shoeshine Boy'? It Depends

'You do stocks?'... The uptrend is strong... What to make of a strange mix of euphoria and fear... Tops, bottoms, and chunks in the middle... Should you listen to the 'shoeshine boy'? It depends... Either way, don't get complacent...

'You do stocks?'...

We noted the current "froth" in the market in yesterday's Digest... The soaring share prices of Apple (AAPL), Tesla (TSLA) and Zoom Video Communications (ZM), and an 11-year-old's desire to spend $50,000 trading call options were the telling examples.

And as you'll see in our mailbag at the end of today's Digest, we heard from a few of our subscribers with other pieces of evidence. Here's a glimpse, courtesy of feedback from subscriber Bonnie S...

Today, one of my spouse's employees came up to him and said: "Doesn't your wife trade the market? You know she needs to buy Apple." Investing, stock market, etc., are not part of this business by any stretch of the imagination.

That reminded us of another anecdote we heard recently from Michael Batnick, the author of the excellent The Irrelevant Investor blog. It's a funny one...

In a recent episode of a regular YouTube show he hosts, Batnick said that he was in his home office, writing a post titled, "Why Everyone's Trading." Then, a plumber doing work in his home walked in and became part of the story...

Literally this man walks into my office and says, "You do stocks?" So I turned to him and said, "What do you got?" He takes out his phone. He was so excited. He said, "What do I do? I've got $130,000 in the market and I have absolutely no freaking clue what I'm doing." And the names he owned are exactly what you'd expect...

The plumber owned the stocks of tech giants like Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), and Apple... and other familiar names like PayPal (PYPL), Tesla, and Visa (V).

Batnick said he couldn't believe that "I had my very own shoeshine moment." He was referencing the well-used line allegedly said by the famous patriarch Joseph Kennedy just before the 1929 crash, "If shoeshine boys are giving stock tips, then it's time to get out of the market."

Even before the plumber walked in, Batnick was making an important point in his original post...

With 170 stocks in the Russell 1000 Index already doubling from their March bottoms through that point in late July, he explained that as the reason why everyone was trading. More from Batnick...

The angle I was going for was all of the conditions could be in place – free commissions, the [Barstool Sports founder Dave] Portnoy effect, quarantine, stimulus – all of that could happen, but absent the most important condition of stocks going absolutely [bananas], people wouldn't be trading.

Most importantly – and this is the salient point of the story – Batnick was quick to say that hearing these "shoeshine boy" anecdotes to make trading decisions should not qualify as an investment strategy.

In other words, you can take the story into account... but you must also look for data to back it up. And then, you need to put it in the context of what is going on in the world and why you own your investments in the first place.

As we often write here in the Digest, Batnick essentially said your investment decisions should be based on your own situation – your goals, your time horizon, and your risk tolerance. They shouldn't be based on anyone else's situation, from the folks who may be talking on TV, the Internet, or in your office. As Batnick continued in the interview...

I understand the temptation to act on these stories. I really do. And if you're trading for a living then maybe anecdotes like this are actionable, but that's probably not how you feed your family. You're not trading for income, you're investing for a better future.

There are always reasons to sell, and stories like this are one of them. But before you do that, you have to understand that it's easy to get out of the market, [but] it's incredibly hard to get back in. If you've tried this yourself, then you know exactly what I'm talking about.

This might end badly, but the best way to make sure you don't lose is by playing a different game.

Building wealth slowly over time is a reasonable objective. Trying to get rich quick is the opposite.

That's always sound advice. As longtime Digest readers know, our founder Porter Stansberry has said there's one way to get rich in stocks... Buy high-quality companies at a good price and hold them for the long term.

Batnick's words – spoken and written near the end of July – have read well over the past month... The benchmark S&P 500 Index just had its best August since 1986, up 7%, and the tech-heavy Nasdaq Composite Index added nearly 10% during the month.

If the plumber stayed in, he was happy – this time. This month could be different.

Our colleague Steve Sjuggerud recently provided similar perspective for his subscribers...

Steve addressed market euphoria in the August issue of his True Wealth newsletter when he wrote...

"Steve, surely stocks can't keep this up. The S&P 500 is up 52% since bottoming in March. Shouldn't we expect the bottom to fall out soon?"

Look, I hear you. U.S. stocks have now recovered ALL of their losses from the drop in March. And this week, we saw new all-time highs in the S&P 500 once again.

So even the phrase "buy stocks today" might feel like an oxymoron. Aren't we supposed to buy low and sell high?

That's the No. 1 rule you always hear in investing. But in reality, buying low and selling high requires a little more finesse than you might think.

Steve said the better strategy is to follow the trend... You want to buy high and sell higher. He noted that he has learned "not to panic when breakouts are happening in stocks"...

Instead, by looking at the history of the markets, we see breakouts like these are a darn good sign.

Since 1950, the typical return for the S&P 500 has been about 7.6% per year. That's what you would've made if you'd bought in 1950, socked your shares away in a drawer, and didn't look at them until today.

But if you'd invested only after the S&P 500 broke out to a new 52-week high, you would've done even better...

Specifically, buying at new highs has led to a win rate of 84% over the next year. And it doesn't just give you a high chance of making money – it can also lead to higher returns.

Take a look at the table below...

History shows us we can expect a 5% gain in six months after hitting a new high in stocks. And over a year, we could be nearing double-digit gains.

And as we know, the Federal Reserve's "easy money" stock-juicing policies are in full gear right now. The central bank has opened the door to flood the financial system with unprecedented amounts of money, and it has kept interest rates low.

That's rocket fuel for stocks. So Steve and his team believe the new highs today aren't a sign of exhaustion for the market, but an opportunity for investors. As he wrote, based on his indicators...

In short, yes, stocks are breaking out. But that doesn't mean it's time to worry and sell. The uptrend is strong. Don't fight it.

When we look closer, we see a unique blend of euphoria and fear in today's market...

To understand what's going on, you must think about scale and look at the details, which show us...

1. Much of the exponential growth in stocks, at least in the major indexes, has been linked to just a handful of names.
2. Yes, the "shoeshine boy" stories may be making the rounds, and the voices of so-called Robinhood traders, including "Davey Day Trader" Portnoy, may be loud and get a lot of attention. But in general, they are still outnumbered in action by bears.

On the first point, we turn to DailyWealth Trader editors Ben Morris and Drew McConnell...

They produced some great work recently on what they're calling the "FAAAM" stocks. "FAANG" needed an update, with Microsoft taking Netflix's (NFLX) place and using the Alphabet name instead of Google.

As Ben and Drew pointed out, the five Big Tech stocks are moving their sectors the most by far. This probably doesn't surprise you, but the scale they found might. As Ben and Drew wrote yesterday to their subscribers...

It's the FAAAM show...

Apple and Microsoft were up 94% and 39%, respectively, over the past six months. They contributed the vast majority of the gains in the tech sector.

Amazon climbed 83% over the past six months. It contributed essentially all of the gains in the consumer discretionary sector.

And Alphabet and Facebook were up 22% and 52%, respectively, over the past six months. They contributed the vast majority of the gains in the communications services sector.

The FAAAM stocks aren't the only big winners over the past six months... But we can see that the S&P 500's gains are heavily concentrated in a small number of stocks.

If your portfolio's returns aren't matching the gains in the indexes, that's likely why. And while it might be frustrating, it may be because your portfolio is better diversified than the indexes... which could be valuable in the near future if some of these high-flying stocks reverse.

Depending on your point of view, that either means there's reason for the other 495 stocks to run higher... or that investors in the most popular tech stocks who are sitting on gains could sell at the first sign of a significant pullback, leading to a dramatic drop.

On the second point, let's look at the market's 'fear gauge'...

As longtime readers know, the Chicago Board Options Exchange's CBOE Volatility Index ("VIX") is often referred to as the market's "fear gauge."

The VIX measures the expected volatility in the S&P 500 Index over the next 30 days by looking at the prices of call and put options for a wide range of stocks.

It measures the prices people are willing to pay for these stock options. Ben and Drew also described the details in a recent special report for DailyWealth Trader subscribers...

When folks are worried about a crash, they buy put options to protect their portfolios against falling stocks... So put prices rise. And the VIX rises with them. The VIX can also rise when folks go heavy on bullish bets by buying call options.

When people aren't too worried about falling stock prices and they're not making a lot of big bets on higher prices, the VIX drops. Historically, when the VIX is low, the odds of large moves in stock prices are also low. When the VIX is high, the odds of big swings are higher.

It's useful to look at the VIX to get a feel for what's happening in the markets... When it's high, it tells us more investors are expecting big moves, or volatility, than usual. It shows that they're scared. And when the VIX is low, investors have basically been lulled into complacency.

The VIX can often act as a contrarian indicator for investors who track it. For example, when Porter made his "buy" call on long-term stocks back in March amid the COVID-19 pandemic-related panic, the VIX had hit an all-time high of 80 about a week earlier.

As Steve wrote in yesterday's issue of his free DailyWealth e-letter...

When the VIX peaked on March 16, 2020, it was a sign of maximum fear. Just a week later, the S&P 500's month-long fall came to a halt. It stopped falling and started soaring.

The S&P 500 hasn't looked back since. Take a look at the chart below...

The VIX has trended lower since then. Today, it's much lower, at 25... But that's still above the gauge's long-term historical marker of low volatility. As Ben and Drew wrote...

The VIX goes back to 1990. And in its first three decades – through the end of 2019 – it had a median value of 17.2. In other words, the VIX spent half its time above and half its time below that level.

We consider volatility to be high when the VIX is above 20... and extreme when it's above 30.

The important point here is that considering the VIX can help you make decisions about buying or selling stocks... When you see extreme VIX readings on either end of the median, you can take massive fear as a buying opportunity or persistent complacency as a signal to possibly trim some gains.

On this point, we're reminded of a good (and humorous) piece of advice that longtime technical trader Peter Brandt shared on Twitter recently...

My advice to young traders who want long trading careers: Stop being obsessed with catching tops and bottoms and become willing to accept large chunks in the middle. Or, because I am a boomer, forget what I just said.

This is all a long way of saying that we're in one of the "large chunks in the middle" today.

Valuations are stretched, and a good number of investors are still fearful. What's more, as Chris Igou of Steve's research team shared in the August 12 Digest, speculators aren't overwhelming the market yet either.

And they're usually the last folks to show up for the party.

Either way, don't get complacent...

Yes, it makes sense to see the tech stocks making huge gains during a year when these companies have seen real explosive growth.

And anecdotally, from the "shoeshine boy" stories, we get the sense that a lot of investors – whether they are aware of it or not – are riding a huge wave of central bank "juice" and believe that the U.S. government and the Fed will step in with more cash at the first sign of more trouble.

As we've said today, the trend in stocks is up. But broadly speaking, we still see things that indicate volatility may return soon... mainly from the euphoria camp.

Certain bullish sentiment indicators are at extremes, as NewsWire analyst Mark Putrino wrote today, which says we're overdue for a selloff.

And to follow up his post yesterday about his "spidey sense" of a bubble awakening, Empire Financial Research founder Whitney Tilson shared several examples in his free e-letter today of fundamental data that points to extremes greater than those of the dot-com bubble.

We also have the lingering uncertainty of November's presidential election, a once-every-four-years event that typically drives the stock market one way or another.

You'll likely drive yourself and your family crazy if you try to time every twist and turn in the market, though. We suggest you let our short-term traders like Ben and Drew and Ten Stock Trader editor Greg Diamond do that for you...

For instance, Greg, a chartered market technician, has warned over the past two days that he would not chase stocks over the next two weeks, based on his indicators. Greg also said that he's seeing some strange behavior lately. This morning, he wrote shortly after the start of the trading day...

Another wild start with interest rates DOWN, tech down and industrial/transports/banks UP! You can't make this up, but just goes to show you the volatility that is unfolding.

This strange correlation/price behavior is going to resolve itself one way or another where everything rallies or everything falls.

Greg urged his subscribers to be cautious. So again, as we wrote in the August 10 Digest, this is not the time to get complacent. Our proprietary Stansberry Complacency Indicator – which takes into account options-trading behavior, too – recently sent a bearish warning signal.

And as subscribers to Stansberry's Investment Advisory know, this indicator has a remarkable track record over the past 25 years. As we wrote two weeks ago...

We won't get into all the details of how this indicator is calculated, but just know that a "complacency score" of less than 30 (out of a 0-to-100 scale) has correctly predicted a decline of 10% or more in 10 out of the past 12 market corrections – including March's 34% crash in the benchmark S&P 500 Index.

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 once has it led to a correction of less than 10% within 12 months. And that time still corresponded with an 8.4% decline.

If you've taken our advice about portfolio allocation, position sizing, and stop losses – and already hold some extra "dry powder" outside of cash – you're likely in good shape.

But if your portfolio is made up of mostly speculative stocks today, or if recent moves have thrown your allocations out of whack, you might want to consider taking some profits... or raising cash that you'll be able to use to seize the next great buying opportunities.

That's the type of sound advice you can give back to the shoeshine boy or the plumber...

How the U.S. Election Could Impact Global Stocks

Stansberry Research international editor Kim Iskyan breaks down how November's presidential election will impact economies and stocks around the world.

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 9/1/20): Amazon (AMZN), Alibaba (BABA), Cognex (CGNX), DocuSign (DOCU), New Oriental Education & Technology (EDU), Expeditors International of Washington (EXPD), Alphabet (GOOGL), JD.com (JD), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CICC China Leaders 100 Index Fund (KFYP), ProShares Ultra Technology Fund (ROM), Southern Copper (SCCO), Sea Limited (SE), Sabina Gold & Silver (SGSVF), Sprott (SII), S&P Global (SPGI), Spotify Technology (SPOT), The Trade Desk (TTD), Vanguard Inflation-Protected Securities Fund (VIPSX), Vanguard S&P 500 Fund (VOO), and Zendesk (ZEN).

In today's mailbag, comments on an overvalued market, our vaccine discussion from Monday, and more feedback on Dan Ferris' Friday Digest. Do you have a comment or question? As always, send your e-mails to feedback@stansberryresearch.com.

"With the recent new highs in the market indices I thought you might want to hear a new take on the 'Mom Indicator' that several of the editors have referenced in the past.

"Today, one of my spouse's employees came up to him and said: 'Doesn't your wife trade the market? You know she needs to buy Apple.' Investing, stock market, etc., are not part of this business by any stretch of the imagination.

"Sounds like a cross between the 'Mom Indicator' and the 'Cabbie Indicator' to me. Don't even know why he knows anything about what I do or don't do about investing, but he seemed very intent that this information be shared with me." – Paid-up subscriber Bonnie S.

"Impressive performance of ARK Innovation ETF [ARKK]! The last stock fund I remember rising over 100% in a year was Janus Mercury fund in 1999 and it was cut in half in the following bear market." – Paid-up subscriber Martin M.

"While reading about the FDA recklessly short cutting the COVID-19 vaccines currently undergoing trials in Monday's Digest, am I the only one who can't get the Will Smith movie I Am Legend out of my head?" – Stansberry Alliance member Jerrald C.

"[Dan quotes] the Fed: 'However, inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.'

"What the hell are Powell and his economists ranting about? Deflation and falling deflationary expectations correct an inflationary recession and leads ultimately to strong real economic growth, especially once bankrupt firms are driven out of business.

"His pursuit of inflation is seditious criminality, which could foster the economic collapse of western economies. He apparently chooses to ignore the fact that wonky Fed beliefs and policies have precipitated all 20th century recessions and depressions. While I enjoyed your comments (translation) this is such a serious matter I would push for immediate termination of the Fed, arrest, trial, and imprisonment of the officers and their economists." – Paid-up subscriber Kendrick M.

All the best,

Corey McLaughlin
Baltimore, Maryland
September 2, 2020