The Relentless Rally Continues

The relentless rally continues... A new record for the S&P 500... Goldman agrees with Sjug... A big bullish sign for Europe... Insurance stocks rebound from hurricane fears...

The relentless rally in U.S. stocks continues...

Following a brief pause last month, the market is back in rally mode. The benchmark S&P 500 Index jumped 1.1% to a new record close yesterday, its biggest one-day gain in nearly five months. The Dow Jones Industrial Average surged more than 250 points, its biggest gain in more than six months. And all three major U.S. indexes are now positive for the month.

Regular Digest readers know we've been cautious... U.S. stocks are long overdue for a correction, and history suggests the next couple of months could be weaker than usual. But we've also urged you not to get too bearish yet.

Sooner or later, we will experience a pullback. But inevitable doesn't mean imminent... And our colleague Steve Sjuggerud's bullish "Melt Up" thesis remains intact. We could be headed higher immediately.

Sjug is no longer alone in expecting the rally to continue...

Longtime readers know Steve was among the first analysts anywhere to turn bullish on stocks back in early 2009. He was one of the few who remained consistently bullish over the past eight years. And he has been virtually alone this year in predicting that the rally will continue further.

But that is starting to change...

Recently, a handful of notable investors and analysts have begun to echo Steve's bullish call. This week, Goldman Sachs Chief Equity Strategist David Kostin became the latest. And his reasoning should sound familiar. As financial-news site MarketWatch reported on Monday...

Investors worried the U.S. stock market could be poised for a turn lower should rest easy: nearly everyone feels the same way... That paradoxical-sounding view comes courtesy Goldman Sachs, which argued that cautious investors were one of two reasons that "an imminent correction is unlikely" in U.S. markets.

"Of course, at some point [stocks] will retreat; it has been 14 months since a 5% selloff and 19 months since a 10% correction," wrote [Kostin.] "But because investor euphoria is nonexistent, an imminent start of a long decline seems unlikely."

A famous market axiom from noted investor John Templeton argues that "bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." Rather than markets being awash in euphoria, Kostin argued that "investors today are situated between skepticism and optimism," calling them "tormented bulls."

Of course, this is exactly what Steve has been saying for years...

As he reminded readers in his free DailyWealth e-letter last summer...

YOU KNOW WHAT A TOP FEELS LIKE. You went through one in the real estate boom in 2006-2008... At the top in real estate...

• EVERYONE was optimistic about house prices. Nobody was cautious. No one even thought that there was even any downside risk. (People felt that way about dot-com stocks in 1999, too.)

• EVERYONE was "in" – and heck, if you weren't "in," you wanted in!

• EVERYONE was talking about real estate at cocktail parties, sharing their "can't lose" strategies.

Everyone thought they had their own spin on it... They thought they had their own unique way of making money that was somehow special to them. They didn't realize that, whether they were "flipping" houses or "developing" houses, all the strategies were essentially the same – in that they all relied on higher and higher asset prices to succeed. THAT is what a top looks like. THAT is what a top feels like...

So let me ask you, does this feel like a top in stock prices? Is everyone optimistic about stock prices? Is everyone "in"? Is everyone talking about their "can't lose" stock strategies at cocktail parties?

If you can't answer yes, then this is not a top. This is not a moment like the one we had with tech stocks in 1999, or real estate in 2006-2008.

Yes, the market is expensive. And yes, we're overdue for a correction. But until investors finally turn bullish again, the bull market will likely continue.

Our advice remains the same: Stay long, but keep an eye on your trailing stops, just in case.

A big bullish sign for Europe...

Steve also remains bullish on European stocks. He turned bullish back in January when they met his three favorite investment criteria – cheap, hated, and in an uptrend – for the first time in years.

European stocks have done well this year, but they have continued to lag the more explosive rally here in the U.S. The benchmark STOXX Europe 600 Index is up about 4% year to date, compared with the S&P 500's return of nearly 15%.

But new data suggest that may not be the case much longer. As Bloomberg reported last week...

European investment-grade companies are in the middle of a deleveraging wave thanks to a self-sustaining economic recovery – spurring hopes their cash windfall will finance shareholder-friendly activity in the months ahead, according to analysis from JPMorgan Chase.

Net leverage among European corporates tracked by the bank has fallen from 3.2 times to 2.9 times over the past year, helped by low interest rates, an uptick in margins and the fastest pace of earnings growth since 2010...

European businesses now have substantial firepower to go on a buying spree or increase share buybacks, as the proportion of earnings paid out to shareholders has fallen over the past year. "Based on the U.S. experience during this cycle, they may soon decide to spend their windfall on acquisitions or on supporting their stock prices," analysts including Matthew Bailey wrote in a recent note.

As regular readers know, surging share buybacks have been one of the biggest drivers of higher U.S. stock prices in recent years. Now, it appears Europe could be joining the party.

Insurance stocks are already rebounding from hurricane fears...

Last week, we noted that Hurricane Irma was unlikely to deal a significant long-term blow to Porter's favorite investments: high-quality property & casualty ("P&C") insurance stocks.

But it turns out the "blip" could be even smaller than originally expected... Irma strayed from its expected path, and its impact was far less severe than originally expected.

As a result, the latest estimates suggest damages could total less than $60 billion, compared with original estimates of $200 billion or more. And insured losses could total less than half that figure, according to disaster-modeling firm Verisk Analytics.

The market clearly agrees... Insurance stocks rebounded strongly on Monday. The SPDR S&P Insurance Fund (KIE) moved up 2.4%. The iShares U.S. Insurance Fund (IAK) rose up more than 2%. And the PowerShares KBW Property & Casualty Insurance Fund (KBWP) jumped 3.7%, its largest single-day gain in nearly six years.

New 52-week highs (as of 9/11/17): AbbVie (ABBV), Allianz (AZSEY), Baidu (BIDU), Biogen (BIIB), iShares MSCI BRIC Fund (BKF), Global X China Financials Fund (CHIX), CME Group (CME), WisdomTree Emerging Markets High Dividend Fund (DEM), Digital Realty Trust (DLR), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Japan Fund (EWJ), Facebook (FB), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), National Beverage (FIZZ), Fidelity Select Medical Equipment and Systems Fund (FSMEX), iShares China Large-Cap Fund (FXI), PureFunds ISE Mobile Payments Fund (IPAY), KraneShares E China Commercial Paper Fund (KCNY), Coca-Cola (KO), KraneShares CSI China Internet Fund (KWEB), McDonald's (MCD), iShares MSCI China Index Fund (MCHI), NVR (NVR), Procter & Gamble (PG), Koninklijke Philips (PHG), ProShares Ultra Health Care Fund (RXL), ALPS Medical Breakthroughs Fund (SBIO), Shopify (SHOP), iShares MSCI India Small-Cap Fund (SMIN), ProShares Ultra S&P 500 Fund (SSO), Guggenheim China Real Estate Fund (TAO), TransCanada (TRP), Verisign (VRSN), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).

In today's mailbag, a question about silver... and accusations of fraud and deceit. Send your notes to feedback@stansberryresearch.com. Good or bad, we read them all.

"Hearing a lot about gold lately and I'm pleased because I own it. What about silver? Still... great potential upside? I own silver, too." – Paid-up subscriber Pat L.

Brill comment: In a word, yes... Silver is often referred to as gold's more volatile "cousin." It tends to outperform gold during bull markets, but fall more than gold during bear markets. For example, in the previous bull market from 2001 through 2011, gold rallied as much as 600%, while silver gained nearly 1,000%. But in the five-year bear market that followed, silver plunged more than 60%, while gold fell about 40%. If the new bull market continues as we expect, silver should absolutely soar over the next several years.

"I watched Steve's video today on the opportunity to buy Tencent... at a huge discount. It looks like that opportunity as come and gone a long time ago. [This company's] shares today are actually... higher than buying Tencent outright. Is this another gimmick to lure in new subscribers? Disappointed new subscriber to True Wealth." – Paid-up subscriber Inge D.

Brill comment: Don't worry, Inge, we assure you it's no gimmick... You see, contrary to the opinion of many novice investors, the nominal share price of any individual stock or fund tells you absolutely nothing about the real price you're paying. You must also consider the number of shares that company or fund has issued.

For example, consider two hypothetical companies – Company X and Company Y. They're identical in almost every way, and both are trading at $10 per share today. But suppose Company A has issued 100 million shares, while Company B has issued only 50 million shares. Multiplying the price per share by the number of shares outstanding would give Company X a market capitalization (or "market cap") of $1 billion, while the "price" of Company B would just $500 million.

In other words, despite identical share prices, investors buying shares of Company B are paying 50% less than those buying shares of Company A.

The full explanation behind Steve's current recommendation is a little more complicated. But the idea is the same... Despite a higher nominal share price, folks who follow Steve's advice have a rare chance to own shares of Tencent at a huge discount to their current market price. But again, it's likely just a matter of time before Wall Street catches on and this opportunity disappears forever.

True Wealth subscribers can read Steve's full write-up here. And Digest readers who aren't yet subscribed to True Wealth can learn more about this rare opportunity right here.

Regards,

Justin Brill
Baltimore, Maryland
September 12, 2017