The 'Bond Gods' Are Getting Bearish
A 'moment of truth' for the bond market... The 'Bond Gods' are getting bearish... Sjug: The boom in Japanese stocks is just beginning... New home sales are surging... Why home prices are likely headed even higher from here...
Regular Digest readers know we're cautious on stocks today...
As we've discussed, several indicators suggest the market is getting a little too "frothy" in the near term. The risk of a correction is rising.
Again, this doesn't mean the bull market is over... But even our colleague Steve Sjuggerud – who has called this bull market better than anyone – believes a pullback is likely before the "Melt Up" resumes.
However, U.S. stocks aren't the only market in danger of a 'shakeout'...
U.S. government bonds could be starting a big move, too.
On Tuesday, the yield on the benchmark 10-year Treasury note broke to a fresh six-month high. (Remember, bond prices and yields trade inversely... Prices move lower as yields move higher, and vice versa.)
It has continued higher since and is now trading above 2.45% for the first time since March. And two of the most notable figures in the bond market believe Treasurys are at risk of serious decline.
For months, Jeffrey Gundlach of DoubleLine Capital – the so-called "Bond God" who correctly called the bottom in interest rates last year – has been predicting an end to the 30-year bull market in Treasurys.
He expects the 10-year yield to rise to 3% in the coming months, officially marking the start of a new bear market. And on Tuesday, he took to social-media service Twitter to warn that this move may be starting now...
And Gundlach is not alone...
Bill Gross – the former "Bond God" who co-founded investment management firm PIMCO – recently issued a similar warning. In an interview with Bloomberg TV earlier this month, Gross said he believes a sustained move above 2.4% in the 10-year yield – exactly where we are today – would be a strong sign that the long bull market was over.
If you're still taking "return-free risk" in long-term Treasury bonds today, this could be your last great chance to reconsider.
'The boom in Japan is just beginning'...
Yesterday, we discussed why the big rally in Japanese stocks in likely to continue.
In short, this week's general election has all but secured Prime Minister Shinzo Abe's re-election next year. This means "Abe's revenge" – Steve Sjuggerud's name for his government's insane "easy money" policies – is unlikely to end anytime soon.
But that's not the only reason Steve remains super-bullish on Japan today. He shared another big one with True Wealth Systems subscribers last night. As he explained in this week's Review of Market Extremes, Japanese stocks have just finished an incredible streak...
Japanese stocks – as measured by the benchmark Nikkei 225 Index – recently moved higher for 16 straight trading sessions. They moved higher almost every single day in October.
It's an amazing streak that you can see highlighted in the chart below...
Japanese stocks are up 7% since the streak began.
Why is this noteworthy?
Because this extreme hasn't happened in a long time... And the last time it happened, it was followed by even bigger gains in the months to come. More from Steve...
It's one of the most impressive runs we've ever seen. And it's been nearly 30 years since the Japanese market has come close to what's happening right now...
The last time we saw a streak like what we're seeing today was in 1988. Back then, Japanese stocks were in full-blown bubble mode. They'd soared for the better part of a decade. But the gains weren't over...
The Japanese market went on to soar 56% over the next 22 months.
Of course, a streak of 16 straight days doesn't happen often, so it would be a mistake to put too much weight on such a limited sample. But Steve and his team analyzed shorter historical streaks and found a similar pattern...
We looked at each time the Nikkei 225 moved higher for 10 or more consecutive trading days.
That's only happened 10 other times since 1970. And Japanese stocks have soared after those extremes. Here are the details...
A streak of positive days is a fantastic predictor of future returns in Japan. It's led to four times the typical six-month return and more than three times the typical one-year return. And it means gains of 10% in six months and 18% in one year are possible, starting now.
Even more impressive, Japanese stocks were positive 80% of the time both six months and a year after these extremes. So we have a high probability of big gains now.
As we mentioned yesterday, one of Steve's favorite ways to profit from Japan today is through the WisdomTree Japan Hedged Equity Fund (DXJ). It provides exposure to Japanese stocks, while "hedging" against a likely decline in Japan's currency, the yen.
If you don't already own Japanese stocks, Steve says DXJ is a great buy today.
In the meantime, another one of Steve's highest-conviction calls continues to play out...
New-home sales unexpectedly surged last month, according to the latest data from the U.S. Commerce Department. Sales rose 18.9% to a seasonally-adjusted rate of 667,000 across the U.S. This is the biggest monthly jump in 25 years, and the fastest annual rate in nearly 10 years, since October 2007. As news service Reuters reported on Wednesday...
In September, new single-family homes sales raced to a more than 9-1/2 year high in the Northeast. Sales in the South hit their highest level since July 2007. There were also strong gains in the West and Midwest last month.
More than two-thirds of the new homes sold last month were either under construction or yet to be started.
With sales surging in September, the inventory of new homes on the market was unchanged at 279,000 units. At September's robust sales pace it would take 5.0 months to clear the supply of houses on the market, down from 6.0 months in August.
The news suggests Steve is exactly right...
This housing boom still has plenty of room to run.
As longtime Digest readers know, Steve was among the first analysts anywhere to turn bullish on housing back in 2011. Yet despite a big rebound in home prices over the past several years – including a new all-time high last month – Steve still remains bullish today. As he explained in the September issue of True Wealth (emphasis added)...
It's simple, really... Looking at the numbers, I see only one logical outcome: dramatically higher home prices in America...
You see, despite a massive real estate boom, the simple supply-and-demand fundamentals for housing point to much higher prices.
Housing demand is high, but supply is low. Therefore, prices must go higher. It's Economics 101.
If you're not already profiting from this trend, you're in luck...
Steve just recommended a brand-new way to do so. It's an unusual "one click" way to own a stake in tens of thousands of rental homes in some of the best markets across the U.S. Better yet, more than 25% of this real estate is in Florida alone, where Steve is most bullish today (and has a huge portion of his own wealth invested). More from the issue...
You know the story with Florida real estate: No snow, and no state income tax. But the story is much better than you think... Florida offers the best value in the world right now... The highest standard of living for the lowest cost...
The prices are good... And keep in mind, you get a lot of value for your money in these places too... Space is not at a premium in these markets. (This isn't San Francisco or Manhattan.)
The average price in these towns near the coast is 10 times higher or more. Plus, these towns have state income taxes. AND space is at a premium.
You might say that Florida is not for you... That you don't want to live here. Hey, that's fine. I get it. It's not for everyone. But you don't have to live here to make money here...
Steve says this opportunity has practically all the upside of rental-property ownership – including leveraged home price appreciation and net rent paid out as dividends – without the headaches of dealing with tenants and repairs.
You can get instant access to this recommendation with a 100% risk-free subscription to True Wealth. Click here to learn more.
New 52-week highs (as of 10/25/17): AllianceBernstein (AB), Morgan Stanley China A Share Fund (CAF), Grubhub (GRUB), ETFMG Prime Mobile Payments Fund (IPAY), JPMorgan Chase (JPM), Overstock (OSTK), VF Corp. (VFC), and short position in Interpublic Group of Companies (IPG).
In today's mailbag, a reader asks for clarity about our correction warnings. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.
"You point out that the combination of tax reform and the Fed removing liquidity from the markets may have an adverse impact on the U.S. economy, along the lines of the comments made by two Fed leaders. I don't pretend to have your insights but value them highly and would like to know where and when you think this will take the markets, short term and long term. Is this why you're suggesting a near term correction?" – Paid-up subscriber Rich R.
Brill comment: Unfortunately, we can't tell you with any certainty when a correction will begin. Anyone who says he can isn't being honest. But we can do our best to prepare our portfolios – and our expectations – for likely outcomes.
Today, several market indicators have reached extremes that typically lead to at least a short-term pullback in stocks. So we've been noting situations (like those you mention) that could potentially trigger that selloff.
But remember, many of the longer-term indicators we follow aren't yet warning of a major market top. So while we expect to see a near-term correction – possibly a sharp, frightening drop of 10%-15% or more that "resets" investor sentiment – the weight of the evidence suggests the bull market isn't over yet.
Could we be wrong? Of course... which is why we always recommend using good risk-management strategies, like proper position sizing and trailing stop losses. They will help protect your portfolio from an unexpected bear market, and ensure that you have plenty of capital available to buy great values at the bottom.
But if Steve is right about the Melt Up, there is also a risk in getting bearish too early. Folks who sell now could miss out on some of the biggest gains in history. Worse, experience shows many of these same investors will make an even bigger mistake and jump back in near the top.
Regards,
Justin Brill
Baltimore, Maryland
October 26, 2017