The Market Is Getting 'Overstretched'
The market is getting 'overstretched'... Investors are piling into the market at the fastest rate since the dot-com bubble... What do Steve Sjuggerud's '
The market is getting 'overstretched'...
The large-cap S&P 500 Index and small-cap Russell 2000 Index burst out of the gates to new highs to start 2018. Last week, the Dow Jones Industrial Average broke 25,000 for the first time ever, less than a month after hitting 24,000. As we noted, that was the fastest-ever 1,000-point move for the Dow.
And it's not just in the U.S... Stocks are soaring around the world. Germany's DAX Index is trading close to record levels, while Japan's Nikkei 225 Index recently hit its highest level since 1991.
Even Russia and emerging markets like China, South Korea, and Taiwan are seeing massive breakouts in their stock markets. The "
Of course, as we often like to say, markets are like runners...
They can't sprint all-out for miles on end. They need to take a "breather" occasionally. And right now, we're seeing signs that the market needs to catch its breath...
First, we look at the relative strength index (or "RSI") of the S&P 500. The RSI is a trusted momentum indicator, with values ranging from 0 to 100. When an asset quickly falls, it can enter "oversold" territory with an RSI below 30. This signals that the asset may be due for a rally. But the opposite is true, too. When an asset rises faster than normal, it can become "overbought," with an RSI above 70. This is usually a time for caution... and a signal that a correction may be around the corner.
Right now, the S&P 500's monthly RSI reading is sitting at 86. As you can see from the following chart, it's at its highest level since the dot-com bubble of the late 1990s...
While this doesn't guarantee that a market peak is imminent, it does suggest that stocks are looking particularly "frothy" at the moment.
Meanwhile, investor money is piling into stocks...
Another reason for caution is the latest survey data from the American Association of Individual Investors ("AAII"), which shows how bullish or bearish individual investors are on the market's outlook over the next six months.
December's reading showed that investor stock allocation has climbed to 72%, the highest reading since the dot-com bubble. And the latest reading was three percentage points higher than November's reading – the biggest one-month jump in four years. In short, investors are pouring more money into the markets than they have in nearly two decades.
As is the case with the S&P 500's RSI reading, the AAII's unusually high reading of stock allocation doesn't mean the top is in. But it is even more reason to take a measured approach
But not every market signal is flashing a warning sign just yet...
In the January issue of True Wealth Systems, Steve updated subscribers on the five indicators he's keeping an eye on to notify him when the end of the
One of these indicators is the health of transportation stocks. The Dow Jones Transportation Average – which holds names like shipping giant FedEx (FDX), airline JetBlue Airways (JBLU), and railroad Kansas City Southern (KSU) – is economically sensitive.
When the U.S. economy is booming, these companies see an uptick in orders as consumers and businesses move goods around the country... so transportation stocks tend to perform well. This makes "transports" a reliable economic indicator. (Porter called transports one of his stock market "lions" back in September 2015.) As Steve pointed out, these stocks are rallying lately...
Steve is also keeping his eye on another vital indicator...
Specifically, he's looking at the advance/decline line. This is a simple tool that measures the number of stocks that went up
If more stocks are falling than rising, this indicator will begin to fall. It's a sign that the market isn't healthy... that only a few large companies are driving prices higher.
There's no need to worry about that today though. This indicator is giving the "all clear" signal, as I write...
As Steve concluded...
There's no reason to expect this boom to end anytime soon...
All five of our early warning Melt Up indicators remain in "green light" mode today. And that means the market's vital signs are still healthy.
Remember, we want these indicators to be hitting new highs alongside the overall U.S. market. A breakdown in these indicators can be an early sign of trouble brewing in stocks.
That's not happening today. Our indicators are signaling "all clear."
Still, now is a good time to start thinking more cautiously...
No one knows exactly when today's bull market will come to an end. But we do know that when the "Melt Down" arrives, investors who have taken steps to prepare their portfolios will fare much better than those who haven't.
We've discussed the merits of using risk-management tools like position sizing, trailing-stop losses, and proper asset allocation. But the best way to optimize your portfolio with a single click is through Dr. Richard Smith's TradeStops software.
Today, more than 23,000 individual investors rely on TradeStops to protect and grow their nest eggs through the
Until midnight Eastern time tonight, you can get started with a 60-day risk-free trial to TradeStops – and learn how to claim a gift worth up to $1,000, just for signing up. If you want to squeeze the most out of the last innings of this bull market, while minimizing your potential losses for a big correction, TradeStops can help you.
Click here to learn more about this special offer. Again, don't delay... This offer will come offline at midnight Eastern time.
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In today's mailbag, Porter responds to a reader's question about how to handle conflicting advice. Are you a TradeStops subscriber? Tell us how it has improved your trading at feedback@stansberryresearch.com.
"Dear Porter, I trust you. I know you don't have a crystal ball, but you have great research and smart, experienced people. But when you recommend a stock, and then TradeStops sends me an SSI on that stock right after I purchased it that tells me it's time to get out of that stock, I'm wondering if the
"Yes, I know that each of your services used their own analysis and interpretation of that analysis, and they may not agree. But when you tell me a stock is going to be amazing, and then you tout the TradeStops service, and then that service tells me it's time to get out of that stock, who do I listen to? ... And I get it – you use a completely different evaluation method than Richard does, and your evaluation is well-supported by historical data. But when you and Richard are saying the opposite thing, who do I listen to?" – Paid-up subscriber David S.
Porter comment: David, I appreciate your trust and, even more so, your recognition that we don't have a crystal ball.
The future, is, of course, unknowable. All investors – including us – face uncertainty.
At Stansberry Research, we seek to provide investors with information, insight, and discipline to help manage the risks of the unknown. Our approach is both "fundamental" and "contrarian." We are looking for good businesses to own where we believe the market has mispriced the equity because of a lack of information or understanding.
We pare this fundamental "
And as you know, we track the value of that advantage each year with our annual Report Cards.
However, almost none of the work we do at Stansberry Research is purely "technical." Even our systematic approaches to investing (like Steve's True Wealth Systems advisory) deal mainly with fundamental factors and known arbitrage relationships between markets.
What our approach to investing doesn't do (and isn't designed to do) is pick bottoms or tops... or predict short-term trends or reversals. For example, I believe that the market fundamentally misunderstands athletic-apparel maker Under Armour (UAA). Shares are woefully out of favor because of poor department-store sales last year and a big resulting build in inventories.
Investors are completely ignoring the value of Under Armour's brand and its success online. I believe that's likely to change at some point in the future. Likewise, I believe that at its current discounted price, Under Armour shares carry much less risk than in almost any other stock in the S&P 500. That combination – a contrarian opportunity, a safe price, and a high-quality business – is a recipe for success.
Over the last 20 years, I've seen time and time again that investors who buy these kinds of situations tend to do very well over the following three to five years. Of course, that doesn't mean this recommendation is guaranteed to work out immediately, or at all. Longtime readers know my best-ever recommendation was chocolatier Hershey (HSY), which I originally recommended back in December 2007. But my investment thesis didn't really start to work out until about 2011.
My experience teaches me that good, safe investing takes time. Success compounds.
Richard's TradeStops business operates on a fundamentally different idea. He approaches the markets from a pure math standpoint. He doesn't see companies, products, and people. He sees numbers with different rates of volatility in different "harmonic" states. That's what math guys call "trends."
He fundamentally believes that buying stocks in the right kind of harmonic state (an uptrend) and maintaining those positions within various measures of volatility is the best way to handle the market's uncertainty. Richard believes you can consistently pick winners by sticking with stocks in certain kinds of uptrends.
Like us, Richard has plenty of evidence to show that his approach will work. But it's a fundamentally different approach than ours. Therefore, it's completely normal that our two approaches would have conflicting ideas. In fact, it's a certainty.
Our advice and Richard's advice will frequently conflict because we're not playing the game in the same way. There's almost no connection between our approach and Richard's.
That doesn't necessarily mean we're right and Richard is wrong, of course. And some investors believe that combining our fundamental research with Richard's trend analysis is the best way to get the highest-quality outcomes. (Naturally, Richard can show you why using TradeStops will always improve your results, no matter what other advice you're following.)
As for me, I've seen that some markets trend and some don't. At the end of a long bull market like the one we're currently in, it will be hard to beat almost any trend-following approach that uses wide trailing stops. If only we could have known for certain back in 2012 that this bull market would run so far or so long!
I hope you will realize that when you measure the effectiveness of an investment strategy turns out to be just as important as what you measure.
I recall vividly that in 2009, my approach – buying great businesses at a fair price and hedging my portfolio by selling short shares of failing businesses – produced superior results to almost all other approaches we tracked over the proceeding decade or so. Other investors who also focus on buying good businesses (regardless of their current stock price trend) – like our own Dan Ferris, Dr. David Eifrig, and our friend Chris Mayer – do extremely well.
But today, I'm sure that portfolios like Steve Sjuggerud's, which are 100% long and focus on stocks with established momentum, will have the best records over the past decade. It has been a huge bull market, after all.
I'll leave you with one final, critical thought...
The evidence that Richard has compiled around the effectiveness of his position-sizing strategies (where you equalize the risk of each position by adjusting the relative size of all your investments) is profoundly impressive. There's no question in my mind that Richard's tools will more than pay for themselves based on the position-sizing technology alone. And if you haven't studied the impact of risk-adjusted position-sizing yet, you probably shouldn't be managing a portfolio. It's that important.
Likewise, Richard's portfolio analyzer, which shows subscribers exactly how much risk they're taking (compared with the broad S&P 500) is also incredibly important. Almost none of our readers realize how much risk they're taking. That might not matter right now, with the market having a record-setting year with big gains and almost zero volatility. But trust me, it will matter soon. Better to arm yourself with knowledge before it's too late. Until midnight tonight, you can claim a special offer for Richard's TradeStops research. Get the details here.
Regards,
Justin Brill and Rebecca McClay
Baltimore, Maryland
January 8, 2018