On January 26, the S&P 500 fell 0.57% – its biggest down day this year. The S&P's last 1% decline was on December 28 (28 trading days ago). The money-management and research firm Bespoke Investment Group calculated the 28-day streak is the longest without a 1% decline in more than a year.
The market's "fear gauge," the Volatility Index (VIX), has been in a steady decline since October, when it was above 45. It sits around 17 today.
The market has priced in the European crisis and zero-percent interest rates. It's complacent. Despite how much the market thinks it knows, it can always be shocked by a low-probability event, or a "black swan," as fund manager and author Nassim Taleb calls it. You never know what will cause volatility... But you can know something will cause it.
Our editor in chief, Brian Hunt, said of this lull: "I'm not saying a huge market hammering is around the corner... probably just a correction. But it sure feels eerie out here. Back in October, I felt like I was in the middle of a battle. But now the battlefield is like a ballroom."
As the market was digesting the financial crisis of 2007 and 2008, the VIX was bouncing between 17 and 25 (a low reading, considering the severity of the issues). Mortgage companies were failing. Bear Stearns received its first bailout... The bad news was "priced in," or so everyone thought...
Then in September 2008, Lehman Brothers collapsed. It was a black swan. From August 18 to October 20, 2008, the VIX more than quadrupled from 18 to 80.
You need to be ready for a return of high volatility. As we discussed in yesterday's Digest, Jeff Clark is buying puts on some weak market sectors in the S&A Short Report. But that's taking precautions against the event that will cause the volatility. The best opportunities come once the high volatility is here... and option premiums explode.
We publish what we believe is the world's best put-selling advisory, Dr. David Eifrig's Retirement Trader. Since launching his service in July 2010, "Doc" has closed 55 winning trades in a row – an incredible 100% win rate. (As a result, Porter gave it an "A++" in this year's Report Card.)
Put options act like insurance for stocks. When people buy put options, they get the right to sell their stock at a set price (the so-called "strike" price). People who sell put options get paid to accept the potential obligation to buy at that price. Of course, if the stock doesn't trade for less than the strike price by the time the puts expire... the seller keeps the upfront payment without ever having to buy the stock.
Doc's track record has shown how this can be a profitable strategy in almost any market condition... But when volatility spikes, that's when the profits really ratchet up.
When volatility rises, the upfront cash that option sellers receive (called the premium) rises... sometimes a lot. Double-digit gains in a few weeks are not uncommon. To learn more about Doc's strategy and prepare for rising volatility, click here...
Low volatility and extremely low interest rates are pushing people into riskier assets... Fed Chairman Ben Bernanke admitted in congressional testimony last Thursday that the low rates are "an issue for many people."
The low rates push people into longer-duration bonds for higher yields. Taking on longer-duration debt increases their risk because it locks up their money for a longer time. Low rates also push people into bonds with higher default risks – high-yield (aka "junk") bonds.
Bernanke justified the lower rates saying, "[O]ur savers collectively have to hold all the assets in the economy and a strong economy produces much better returns in general." But pushing savers into longer-term and riskier assets isn't a formula for helping the economy. It's a formula for a wipeout...
Last week saw the highest issuance of high-yield bonds since May 2011... 23 high-yield deals hit the market, totaling $18.75 billion, the largest amount in history. The old record was $16.5 billion from the weekend ending May 14, 2011.
An update to Steve Sjuggerud's bullish housing thesis... The National Association of Home Builders (NAHB) added 29 cities to its list of housing markets showing improvement. Cities on the list have shown at least six consecutive months of improvement in housing permits, employment, and housing prices. Some new additions include Detroit, Portland, Miami, and Memphis. Right now, 98 cities (in 36 states) make the list. And the list has been growing for six straight months...
"While many of the markets on the February [list] are far from fully recovered, the index points out where employment, home prices and housing production are no longer retreating and have held above their lowest recession troughs for six months or more," said NAHB Chief Economist David Crowe. "This is a sign that a large cross section of the country is starting to turn the corner as local economic conditions stabilize."
As we said last week, Steve has recommended three stocks to play a rebound in housing. Buying these stocks should generate 15% a year in income while the housing market recovers. To learn about Steve's True Wealth service and access these picks, click here...
Are you a victim of Corruption USA?
We are working on a series of reports about the "corruption" of America's financial system. We've described this corruption as a kind of moral decay... a kind of greed... a kind of desperate grasp for power... And it's destroying our nation...
Have you been a victim of this corruption in recent years? Perhaps you were one of the innocent people who lost money in the MF Global scam. Or maybe you invested in Fannie Mae or Freddie Mac in 2008, while Henry Paulson was secretly telling 20 top hedge-fund managers to get out. If you feel you've been a victim of the corruption of America, share your story with us here. Please type "corruption" in the subject line. Don't worry... we won't publish your name.
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New 52-week highs (as of 2/7/12): BlackRock Corporate High Yield Fund (HYV), Invesco High Yield Investment Fund (MSY), PowerShares Buyback Achievers (PKW), Anheuser-Busch InBev (BUD), Cisco (CSCO), Enterprise Products (EPD), and Microsoft (MSFT).
As you know, we believe in the power of owning and compounding with high-quality, dividend-paying stocks (like Hershey, which we wrote about yesterday)... How have you done holding stock in the world's best companies? Let us know at feedback@stansberryresearch.com.
"Thanks for HSY... .More importantly your clarity and persistant message is invaluable I spent 36 years on Wall Street, broker, branch manager, training director, ombudsman, and National sales manager for a Mutual Fund. Also served as Arbitrator for the NASD and NYSE. So I have seen it all... to this day have a new idea every day.
"I was blessed as a rookie broker commuting to Newark NJ every day. Many of my fellow commuters worked at Englehard Metals. Those daily conversations (circa 1960) were about fiat money and bullion. I saw the 'tronics bubble' in the late 60s, wound up in Fort Lauderdale in the early 70s. Empty condos everywhere. Sound familiar?
"The end of the story, I embraced the early teachings of the Englehard men and was buying K/Rands in the $280 area (1970s).
"I don't know how it will end but I do know it will be ugly. I have put on a Texas Hedge ( I guess you have heard of that) in the metals, jr miners, SLW, gold in the ground plays,MLPs along with the core quality stocks you talk about daily... It works!!
"I now walk the beach of that north Florida Island Steve seems to like. Your daily musings are worth their weight in GOLD" – Paid-up subscriber Jack Till
"Porter, is it possible the Libertarian you has become part of the 1% crowd? You know, publish the 1% psychos/accusers who never take any responsibility and send you crazy letters and frequently forget the 99% of your readers who enjoy your work. When we do disagree, do it mostly respectfully. Keep up the good work." – Paid-up subscriber Kevin M Kelly
Regards,
Sean Goldsmith
New York, New York
February 8, 2012
The market's too complacent... From battle to ballroom... What you need to read... Record junk bond issuance... Housing still improving in the U.S... Federal dependents soar under Obama... Are you a victim of Corruption USA?...