The Correction Is Here
The 'correction' is here... What you need to know about today's market turmoil... Prepare for more volatility this year... Healthy correction or bear market warning?... Checking in on the market's 'vital signs'...
It's been a wild couple of weeks in the market...
Coming into today, the S&P 500 Index had closed down in six of the previous eight trading sessions, including drops of 1.1%, 2.1%, and 4.1% – good for its biggest one-day decline since 2011.
The market fell another 3.8% today – making it seven out of nine – and officially closed in "correction" territory for the first time in more than two years. As of today's close, the S&P 500 has fallen 10.1% from its recent high.
Sharp declines like these are never pleasant... But it's important to remember that pullbacks and corrections are a normal and healthy part of every bull market.
As we like to say, markets are like sprinters...
They can't run flat out for miles on end. Occasionally, they need to catch their breath. And the longer or faster they run, the more necessary those rests become.
The S&P 500 had rallied more than 40% since February 2016, without so much as a 5% decline. This was among the longest streaks in history... so it's not surprising to see stocks finally take a "breather" here. It was long overdue.
But none of this means the bull market is over yet.
As regular Digest readers know, our colleague Steve Sjuggerud believes we're entering the 'Melt Up'...
This is the explosive final phase of the bull market, where stocks stop "grinding" higher and begin to outright soar. And Steve thinks the biggest gains of the entire bull market are likely still ahead.
But again, you shouldn't expect the market to move higher in a straight line. If you're going to invest in the Melt Up, Steve says you must be prepared for more volatility. As he explained in the latest issue of True Wealth Systems, published last week...
The last U.S. Melt Up saw an enormous boom in prices. The Nasdaq Composite Index soared 130% from January 1999 to its peak in March of 2000. It was a fantastic time to own stocks. A triple-digit gain in just over a year – in an entire index – is not something that happens often.
But it wasn't a one-way move higher. This is an important point... Investors that don't understand it will likely be scared out of stocks before the biggest gains unfold.
You see, the past two years' gains have lulled investors into a false sense of security... It feels good to never see downside. And it's easy for folks to expect that what has been happening – higher prices with no corrections – is normal.
This isn't normal. Stocks go up and down – even during the Melt Up.
In fact, Steve believes they could go up and down even more than usual as the Melt Up plays out...
As he explained, the market suffered several sharp, frightening corrections as the last Melt Up played out. More from the issue...
Stocks went down a bunch of times during the last Melt Up. You wouldn't know it by looking at this chart though...
It looks like a one-way ride, right?
That wasn't the case, though. The Nasdaq Composite had several big falls during this boom. The chart just hides them because the overall gains were so large.
The Nasdaq actually had five roughly 10%-plus declines during its final push higher. Take a look...
Steve noted that these declines were relatively brief...
But make no mistake, they were every bit as frightening as those we've seen over the past two weeks...
These falls were quick and painful. They all happened in a month or less. And believe me, a 10% decline in a month is tough to swallow.
It makes you question what's going on. It makes you question if the Melt Up is over.
Today, folks are used to a one-way market. But corrections are normal – even in the Melt Up.
Don't be surprised if the market falls 10% this year – it could even happen more than once.
Of course, this begs an important question...
How can we know whether this decline is simply one of several corrections we're likely to see as the Melt Up continues... or the start of the "Melt Down" and a serious bear market?
This is where keeping an eye on the "big picture" is critical.
As regular readers know, Steve has been following several longer-term gauges of market health – including five key indicators that have warned of major market busts in the past. As he reminded readers in the issue...
Last year, we built five indicators to test the overall health of the market... Again, these indicators flashed major warnings signs for the market during the last Melt Up in the late 1990s as well as before the stock market bust in 2008.
In short, we want to see these five indicators hitting new highs alongside the overall market. That's what a healthy boom looks like.
The warning sign will be when the S&P 500 is hitting new highs and these indicators aren't doing the same.
We've updated Digest readers on two of these indicators in recent months...
These are the so-called "advance/decline line," and the transportation sector, or "transports."
As we've discussed, the advance/decline line is a measure of market "breadth." It compares how many stocks in the market are rising versus how many are falling each day. When more stocks are rising than falling, the advance/decline line rises... a sign that the market isn't being pulled higher by a just a few big winners.
The Dow Jones Transportation Average is an index of economically sensitive stocks like airlines, delivery-services companies, railroad firms, and trucking businesses.
When the U.S. economy is humming along, these companies benefit as more "stuff" moves around the country. Likewise, they tend to be among the first companies to suffer as the economy begins to weaken and folks "cut back." (Porter has also been keeping an eye on transports since September 2015.)
We're happy to report that both of these measures continue to give the "all clear" for stocks right now.
Today, we'll also share an update on another of Steve's key indicators...
This is the lesser-known "cousin" to the S&P 500, known as the "equal-weight index."
Like the name implies, this index owns the same 500 companies as the "normal" S&P 500, but in equal amounts. This makes it another reliable measure of market breadth. And as Steve explained, it's also giving us good news today...
The normal S&P 500 is market-cap weighted, so the largest companies carry more weight. That also means the largest stocks can pull up the average, even if smaller companies are falling.
But the equal weight index works differently... The equal weight index only goes higher if most stocks are rising.
As the chart below shows, the equal weight index shows that today's boom is healthy...
What about the last two key indicators Steve is following?
Well, it wouldn't be fair to Steve's paid True Wealth Systems subscribers to share all of the details on these measures here.
But we can tell you that both of them remain in "green light" mode today.
In short, Steve says there's no need to panic or worry about the recent market turmoil. For now, the bull market remains healthy... which means the Melt Up is likely to continue.
Stay long, but stay smart: Make sure your portfolio is properly diversified, and keep a close eye on your trailing stops, just in case.
Again, if you aren't sure what that means – or you could just use some help setting up a "bulletproof" portfolio that's prepared for whatever comes next – we urge you to take a closer look at our Stansberry Portfolio Solutions product.
As we've mentioned over the past couple of weeks, Stansberry Portfolio Solutions was designed from the ground up to take all the guesswork out of this process... and make it simple, easy, and completely foolproof to invest like a professional.
If you're interested, we must hear from you soon. Our annual enrollment period ends tomorrow night, Friday, February 9, at midnight Eastern time. Click here for the details.
New 52-week highs (as of 2/7/18): CME Group (CME) and Match Group (MTCH).
In today's mailbag, feedback on our "short volatility" warnings... and a subscriber is worried about Sjug. What's on your mind? Let us know at feedback@stansberryresearch.com.
"I just wanted to thank you for your warnings about the inverse volatility funds. Before your Digests covering the topic, I didn't know anything about the short volatility trade. But then it got me thinking and after a bit of research I found that SVXY had options issued on it.
"Normally I wouldn't touch an option on one of these products, but with a fund that is guaranteed to fail, it seemed a good hedge. So after the large rise in the stock market this year and with volatility starting to rise at the same time, I dived in and bought the $110 puts with SVXY trading above $130.
"Yesterday I sold the puts with SVXY at $11. In a few days this hedge had made enough to more than offset all the declines in the long portion of my portfolio. Thanks." – Paid-up subscriber Mark
"I have watched VXX for a long time after learning what contango and backwardization meant... and learning that large moves in volatility have been rare in the current financial environment, and that if you are going to play that game (yes, I know a very bad and dumb game) you need to be there almost before things happen.
"When I saw the opportunity developing Friday, I could not resist. On Monday, I bought at $34.67 and waiting as long as I could bear on Tuesday morning, sold at $52.44. Unfortunately, these opportunities are too few and far between." – Paid-up subscriber R. Kemp
"I have nothing but respect for Steve, but I think he is overly in love with his own Melt Up theory. The market has an uncanny ability to humble the best and the brightest. Aside from the perma-bears, no one suspects that this might be anything more than a long overdue correction. Which is why it might be..." – Paid-up subscriber John Montouri
Brill comment: Don't worry, John... we assure you that Steve isn't letting his recent success go to his head. He remains one of the humblest people we know.
But you could be right. The market offers no guarantees... And even Steve admits the Melt Up could end sooner than expected. This is why he's so adamant about using reasonable position sizes and following strict trailing stop losses... to protect your capital, just in case.
However, as we mentioned earlier, none of the important longer-term indicators Steve follows are signaling trouble at this time. The market's "vital signs" remain healthy.
Again, this doesn't mean we can't see further declines in the near term. We were long overdue for a correction. And given how high the market has rallied over the past two years, it could be a sharp one. But history suggests that's all it will be... a correction in an ongoing bull market, rather than the start of a more serious bear market.
Stay tuned. We'll let you know if that changes.
Regards,
Justin Brill
Baltimore, Maryland
February 8, 2018