The Two-Sided Reality About This 'Unimaginable' Bubble

The 'Davey Day Trader' indicator... How much longer can this 'Melt Up' go?... 90% of U.S. stocks are trending up... The two-sided reality about this 'unimaginable' bubble... Steve's conclusion might surprise you...

Was 'Davey Day Trader' right?...

"Stocks only go up," Dave Portnoy, the Barstool Sports founder-turned-pandemic day trader, tweeted to his legion of dedicated, mostly millennial followers last summer.

You may remember our colleague and True Wealth editor Steve Sjuggerud writing about Portnoy before, most recently in an October 2020 Digest.

This one man was seemingly turning a legion of sports fans – with no sports to bet on during the global pandemic – into stock-market gamblers instead. As Steve wrote of Portnoy back in October...

He bets on whatever is hot, or whatever strikes his fancy. He bets big, wins big, and loses big. And he tells you all about it.

At the time, I (Corey McLaughlin) got a much-needed chuckle out of Portnoy's "stocks only go up" statement. Of course, as a Digest reader, you know that stocks don't only go up.

We also considered the source...

This wasn't the first time we heard Portnoy's name. He first gained a cult following by growing a grassroots sports blog in Boston into a multimillion-dollar company with readers all around the world. And now, Barstool Sports is partially owned by sportsbook company Penn National Gaming (PENN).

Whether you like his schtick or not, Portnoy isn't a dumb guy... And he's as much of an entertainer as a businessman. He was turning his dedicated followers' attention back then to gambling with money in stocks, a new line of business for his company.

Unfortunately, though, we know not everyone could sense the sarcasm in Portnoy's "stocks only go up" statement. Instead, they might take it entirely at face value...

That's where we found the nugget of valuable truth in Portnoy's claim...

You see, he was reflecting a general public sentiment of the moment.

While it's clearly not a fact, Portnoy was channeling the thoughts of many novice investors – mainly the many new investors and day traders getting their feet wet in the markets through platforms like no-fee brokerage Robinhood.

Here we were... just coming out of government-mandated lockdowns... the number of unemployed at around 20 million... folks speculating on if or when a COVID-19 vaccine would be developed... the economy in shambles...

And despite all that, stocks were still going up.

More previously unthinkable things were happening, too... The federal government was actually sending checks and debit cards to the American people, a brand-new chapter in the ever-expanding novel of central banks "printing money."

So what else is someone new to the investing game supposed to believe? Would anyone entering the markets at that moment for the first time actually believe that stocks go down?

Here's the point...

The 'Melt Up,' as Steve explained back in October, was back on...

Portnoy and a band of merry traders at home were simply part of a trademark euphoric behavior that Steve has seen before – but not since the dot-com bubble. As Steve wrote...

For the first time in more than 20 years, the general public is buying stocks like they're in a casino. This, my friend, means that the Melt Up is here.

Steve was dead-on... The whole GameStop (GME) short-squeeze bubble – again fueled by many folks who share Portnoy's attitude – was just another big example, as we detailed a few weeks ago.

When our editors start getting calls and texts from family members and friends asking about the markets and new ideas – like they have over the past few weeks – we know the previously uninterested "herd" is getting interested again...

Today, all of the major indexes are back above their pre-pandemic highs... Since the March 2020 bottom, the benchmark S&P 500 Index is up roughly 70% and the tech-heavy Nasdaq Composite Index is up 100%. That's right... the Nasdaq has doubled in less than a year.

At this point, the pertinent question about U.S. stock prices is a common one...

How long can they keep going up?

"Can" is the keyword in that question. It isn't a matter of how long stocks "should" keep going up... or how long they "will" keep going up. It's all about if they "can."

And as our wise colleague and Extreme Value editor Dan Ferris said on a phone call with several of our editors earlier this week, "I don't think we get to know that."

At the time, Dan was responding to a question from our Director of Research Austin Root about the potential economic indicators that might signal an end to this bull market.

The point being, as Steve and his research team frequently like to point out, asset prices can go much higher than many folks can possibly imagine... despite whatever the economy might be doing or telling us what should or will be happening at any point.

We just saw that happen in March, April, May, June, and on and on of last year...

Perversely it may seem, what happens in stocks is often the opposite of what many people – especially new investors flooding into stocks today – think should happen.

Said another way, the U.S. stock market can (and has) peaked well before real economic growth slows down...

And after starting from a lower bottom in 2020 in addition to the rally in U.S. stocks that we've seen since then, Steve has warned in recent months that the inevitable "Melt Down" could arrive as soon as later this year... right when many investors least expect it.

About stocks now...

We talked roughly a month ago about another conference call among our editors where even the bullish in the group brought up how stocks were overvalued by virtually any measure... and that a correction was overdue.

That's still the prevailing thought...

Plus, we're still seeing monetary and fiscal stimulus prop up this market like never before – with potentially more on the way. And we could continue to live with low short-term interest rates, as dictated by the Federal Reserve, for possibly years to come.

Meanwhile, institutional investor sentiment is extremely bullish... The most recent Bank of America survey of more than 200 professional money managers shows cash levels at their lowest point in eight years and a "V-shaped" recovery as the consensus.

At the same time, the market's "fear gauge" – the CBOE's Volatility Index ("VIX") – briefly dipped to less than 20 last week for the first time in a year. That's significant... If you'll recall, the VIX quickly surged to a record of more than 80 at the height of the COVID-19 panic last March. But now, investors seem to be growing more complacent every day.

The signs of "froth" are seemingly everywhere. According to our Stansberry's Investment Advisory research team, we're seeing previously unimaginable things play out in the markets. From the latest issue of our flagship newsletter...

We're seeing extremes across the stock market. Our Black List – a collection of large-cap stocks whose total shares outstanding are worth more than $10 billion and are valued at more than 10 times their sales – is now at 152 companies... an all-time high.

And an astonishing 90% of U.S. stocks are trading above their 200-day moving averages ("DMA") today, as measured by the MMTH Index. Remember, the 200-DMA is an indicator of a medium- to long-term trend... So in other words, this indicator shows that the number of individual upward trends are at historic highs.

(This also reminds us, as Dan said last week, don't confuse a bull market with brains... If you name a stock right now, there's a 90% chance that it has gained a decent amount over the past month or so.)

Astute readers might remember back to March 2020, when an equivalent reading showed that the percentage of New York Stock Exchange stocks above their 200-DMAs dropped to less than 3%. We brought it up on March 23, 2020, as a way to gauge a "bottom"...

The last time the numbers were this low was during the financial crisis... And back then, the number of stocks trading above their 200-DMAs lingered below 10% for months, from October 2008 until the ultimate bottom in April 2009.

Throughout history, only when this number gets close to or above 15% is the market "safely" rebounding...

While we're not soothsayers by any means, we know now that the market bottomed on that exact day. We can't know what the future holds, but it's worth paying attention to this sentiment indicator.

In other words, we're at an extreme of greedy sentiment today...

But as we've said before, sky-high readings of "market breadth" indicators – which show the number of stocks going up versus down – have traditionally meant two things that cover two different sides of the story...

One, we're overdue for a short-term pullback. But two – and most importantly for long-term investors – more upside is possible over a longer timeline of months or possibly years...

We noted in November that peaks in market breadth like we might be seeing today have happened two years before "price peaks" in the last two market cycles.

Said another way, the fact that 90% of U.S. stocks are in strong uptrends now doesn't define a top as clearly as when the percentage of stocks trading above their 200-DMAs dips below 10% or 15% – and subsequently rises back above that range – can show a bottom.

Why? Because tops don't happen overnight... they happen over time. In other words, what happened in March wasn't a typical Melt Down.

You see, a Melt Down follows every Melt Up. And during a Melt Down, new investors who may have gotten into the market over the past several months and know nothing else but "stocks always go up" believe the first dips present good buying opportunities... And they end up buying nearly all the way down in some cases – the worst thing to do.

Alternatively, more sophisticated investors see the bigger picture and sell higher – when their stops are hit, for instance. This allows them to take profits and live to see another day...

With all this in mind, Steve recently looked at similar stock market rallies throughout history...

We're now going to share some of the details of Steve's latest issue of True Wealth Systems, published earlier this month... It's chock-full of great information and analysis.

If you're a subscriber to True Wealth Systems or a Stansberry Alliance member, I urge you to check out this issue if you missed it.

Steve dug into similar rallies in the U.S. markets to see if "today's bull market is as overstretched as many folks think." As he wrote...

In order to do that, I had to ask two questions...

• Is a 74% return in the S&P 500 [the return at the time since March 2020] without a correction or bear market normal?

• How long does a market usually go without seeing a major pullback?

To get the answers, Steve and his research team used their True Wealth Systems computers to find every S&P 500 rally without a correction since 1950. And they reported their findings...

It turns out there were 34 of these "unbroken" rallies in the past 70 years. But what you might not expect is that 10 of those ran 70% or higher before seeing a 10% pullback.

Said another way, nearly a third of historical rallies were more dramatic than today's. And the most extreme ones made today's move look like nothing!

In total, six out of those 10 doubled before seeing a correction. Take a look...

Steve and his team found that the S&P 500 has gone on several multiyear runs without ever looking back. It even rallied 301% from late 1990 to late 1997 – seven years – without a 10% fall.

Another impressive move happened from early 2003 to late 2007... when the S&P 500 was up 112% without a correction. Even our last bull market experienced a similar move... from 2011 to 2015, with gains of 110%.

So where does today's rally fit in?

Steve pointed out what a lot of folks aren't saying about this bull run...

Today's move happens to fall right near the average over the past 70 years... which was a 61% gain.

Sure, we could see a pullback soon. It wouldn't be surprising. But we could also see today's rally go a lot further from here before hitting any kind of record.

Stocks could double again, and this still wouldn't be the most extreme example in history!

That's what I expect to see this year... a continuation of the massive rally that has taken place.

And Steve made what might be considered a surprising conclusion...

To say we're overdue for a fall is a stretch when we look at the data. That's why we're following our TWS computers closely instead of letting our fears dictate our next move.

This is something that took me a few years to understand once I started investing...

While stock prices going up (or down) might not "make sense" to a rational thinker, the market doesn't necessarily care what we think about what the government is doing to the U.S. dollar or anything else.

But it does care what everyone thinks at the same time... And right now, a collection of new investors are helping to push prices higher, and the Fed is pushing people consciously or unconsciously into the market. We may not like it, but as Steve writes...

This is not the time to get twitchy fingers.

We will let our computers navigate us through those bumpy waters when they arrive...

If the next correction is right around the corner, our systems will get us out to avoid heavy losses. But we don't want to let fear of a correction force us to miss out on the next leg higher.

Great, but should you go 'all in' or 'all out' of stocks today?

We don't blame anyone for asking this question right now.

But first, the answer is different for everyone, depending on your situation. And many of our editors would argue that it's the wrong question to ask anyway...

As we've written before, the answer – expressed via your portfolio allocation – doesn't have to be so black and white, as much as your emotions might tell you that's what you're supposed to do. Our Investment Advisory team put it like this in our latest issue...

It's important to be hedged, and not to chase after risky "get rich quick" stocks.

Now is the time to be careful. Follow your stops. And patiently accumulate shares of great companies as they fall into buy range.

And there's the "do half" way of thinking, too...

If you're frozen on an investment decision, do half – that could be buying or selling – of the amount you're thinking. That way, you'll feel right if the trade works out and not as wrong if it doesn't... And you'll still have half the money to use elsewhere.

Said one more way, stocks can be expensive (and they are) and you might not want to put new money into the U.S. market today at these levels... But prices can also go higher, meaning you might not want to get out of the U.S. stock market completely either.

When you think about all this... you can see why you must have an investing plan.

Most folks don't, and they react based on their emotions. And let's face it... that is what gets us in trouble and – as our founder Porter Stansberry has said before – most of the time tells us to do exactly the wrong thing at the worst possible moment.

So today, if nothing else, take a moment to reflect on where U.S. stocks are today...

Yes, they're expensive. But yes, they can also go higher.

You want to make sure your portfolio and investment plan align with your goals, timeline, and how much you're willing to risk on both sides of the bubble.

How to Break Up With a Stock

How do you know when it's time to call it quits on your stock? Our colleague Daniela Cambone recently spoke with Ian Cassel, the founder of MicroCapClub, who dished out plenty of worthwhile advice...

"One of the hardest things is to pay attention to the business and not the stock price," Cassel said. He also shared several essential market survival tips, like how to avoid making rash leaps of faith in investing and getting caught up in the fear of missing out...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

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In today's mailbag, feedback on Chris Igou's Tuesday Digest about the "hidden" demand for oil... and a "thank you" note for Crypto Capital editor Eric Wade stemming from our Q&A with him in yesterday's Digest. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I appreciate the effort that you and the team put towards the daily Digest and today's writing about oil is no different! Full of data and solid logic.

"That said, I couldn't help but remember Porter or one of the analysts discussing coal in a similar way several years back. At that point coal fired power plants were generating about 40% of all the electricity in the U.S. It was said that it would take decades before we would work our way out of coal as an energy source. Not quite a decade later coal power generates about 22% of electricity in the U.S. and most coal stocks have been decimated.

"It may be different this time and, at least for the current time period, I hope you're correct. I own XOM and CVX and with this most recent rise feel very good. Reading your article today was just a reminder to pay attention as the obvious and logical don't always work out exactly as you might think." – Paid-up subscriber Bill F.

"In response to the Stansberry Digest article on the death for gasoline and diesel powered cars...

"With rolling blackouts across multiple states because we are not producing enough electricity to meet the demand as has been in the news the last few days, how are we all going to plug our hundreds of millions of electric cars in for recharging and not have demand issues? While we are building lots of windmill farms and expanding the use of solar panels, much of that construction is being used so we can shut down all the coal power plants, not to greatly expand electricity production." – Paid-up subscriber Alan G.

"I'd like to throw my full support behind Eric Wade and his crypto newsletter. I am 51, and should have a lot more in my retirement account. When the 2009 crash hit, I got hit hard and stayed out of the market for a long time. Poor decision on my part, as I missed out on part of the greatest bull market in history. Being self-employed and seeing retirement coming up in the next decade, I had felt I was too far behind.

"When Porter made his strong case for bitcoin in 2019, I saw the potential and understood it was not a fad. That was my 'aha' moment. I started with one Bitcoin at $10K, bought more when it dipped, and have been adding more along the way using any extra cash we have. We sold an RV and put it all into bitcoin and Eric's other recommendations, which have more than quadrupled in 5 months. Every time I get extra cash, I add more. Let's just say that in the last year and a half, I have made up financially for all those years I missed, and more gains are on the way.

"Eric's Netscape moment analogy perfectly sums up where we are with cryptos right now. Mass adoption is just around the corner. When the average person realizes they can buy part of a Bitcoin with leftover change or a tax refund check, the flood gates will open. Everyone will want to say 'I own bitcoin.' What's more, they will jump into any crypto under a dollar hoping to stick it rich. The 'lottery' mentality will hit everyone. And trust me, you want to be on that rocket before it takes off.

"I use crypto.com for most of my purchases. It is FDIC insured up to $250K (just like a bank), easy to transfer money into from a bank or investment account, and transactions are a breeze. And they secure it in their own wallet so you don't need a third party app. It holds most of the popular crypto as well, so it's a great place to get your feet wet. I even just signed up my 82-year-old mother with a crypto.com account!

"I am not concerned about the future of crypto, especially with institutional investors throwing billions into crypto each week. They wield too much influence to allow lawmakers to erase their fortunes. And I think regulation of cryptos will likely only strengthen the good ones, making them inherently more valuable.

"Thank you, Eric, for saving my retirement. I owe you a bottle of that recommendation you made last month." – Paid-up subscriber Darren N.

Corey McLaughlin comment: Darren, we admire your enthusiasm for bitcoin... And we're right there with many of your thoughts. But your note also compels us to once again make an important point to everyone reading today...

Just because bitcoin has surged in price over the past few months doesn't mean it will keep happening in a straight line forever.

As Eric points out in his weekly updates all the time, bitcoin's price is more volatile than many assets we've seen... And he doesn't recommend putting any more money than you are comfortable losing into it or any other cryptocurrencies. As with anything, make sure you understand its place in your portfolio.

It's great to enjoy the returns, no doubt. We've heard similar stories from several subscribers recently. But also be careful not to get too high on "paper profits" or too far out "over your skis." In other words, make sure you aren't overallocated to cryptos if you don't want to be. Be smart about position sizing.

It's easy to get euphoric when everyone is talking about cryptos today... and the prices keep going up and up. But we urge anyone interested in this space today to make sure to heed the advice of a trusted guide like Eric...

We've said it before, but you won't find anyone more dedicated to helping individual investors understand the ins and outs of bitcoin and the rest of the crypto universe than him. When it comes to where cryptos fit in your portfolio, the best times to buy and sell, and more... we follow Eric's advice.

For anyone who hasn't yet, click here to listen to his latest message. He explains everything you need to know about getting started in the crypto space today.

All the best,

Corey McLaughlin
Naples, Florida
February 18, 2021