The Worst Mistake an Investor Could Make Right Now
The biggest update to my 'Melt Up' thesis in years... Why I changed my 'Melt Down' prediction... The huge sentiment shift in stocks this year... Valuations alone don't kill bull markets... The worst mistake an investor could make right now... The No. 1 way to protect yourself, no matter what happens next...
Editor's note: The S&P 500 Index snapped a seven-month winning streak in September...
After hitting a new all-time high on September 2, the benchmark stock index turned lower. It ultimately fell 4.8% during the month – its worst monthly performance since March 2020.
Is this the beginning of the end?
If you listen to our colleague Dan Ferris, it could be. In last Friday's Digest, he gave readers "a sneak peek of what it feels like at the top" and advice on what they can do to prepare.
Not everyone at Stansberry Research agrees with that sentiment today, though... And as regular readers know, we strive to give you all angles of our analysis – even if our editors' viewpoints don't completely align. That's what we would want if our roles were reversed.
So in today's Digest, we're turning things over to True Wealth editor Dr. Steve Sjuggerud...
As you'll see, Steve recently changed his views on the markets in a big way. And related to that, he has identified one critical mistake that investors must avoid at all costs right now...
Back in February, I (Steve Sjuggerud) made the biggest update to my Melt Up thesis in years...
As Digest readers know, I've been bullish for the past decade. I've urged my readers to stay long stocks that entire time, regardless of whatever worries gripped the market along the way.
I unveiled my "Melt Up" thesis in 2015. And it has played out just as predicted since then... Stocks have soared to incredible heights, once again, despite plenty of market fears.
That's because when it comes to timing market peaks and bottoms, I've had the most success in my career using sentiment to time the market.
That's also why, in February, my views on the market took a hard turn...
"The Melt Down Will Arrive – Here, in 2021."
That was the headline on the March issue of my True Wealth newsletter.
To put it simply, market sentiment had hit crazy levels at the time... Everyone was bullish. And that, to me, was the signal that the current Melt Up was coming to an end.
Remember, shares of video-game retailer GameStop (GME) had just soared more than 1,000% in a now-legendary short squeeze. The "GameStop story" became so popular that it quickly spread outside of the world of finance and into pop culture...
Folks plastered memes all over social media site Reddit to hype up the trade. Teens got on video app TikTok to talk about investing. And streaming giant Netflix (NFLX) started talking about turning the whole saga into a feature film.
It felt like we were quickly approaching a top... that moment just before the Melt Down... where everyone who piled into the market looks around and realizes, quite simply...
There is no one left to buy.
That's when the panic happens. And it's why, at the time, I expected that we would see the Melt Down begin by the end of the year.
But now, I'm looking at the world differently than I did back then. When the variables change, my outlook changes with it...
I'm no longer expecting the Melt Down to begin this year.
Instead, I'm actually as bullish right now as I have been all year. Here's why...
Is everyone you know in love with stocks right now?
Are you getting calls or e-mails from friends and acquaintances talking about the next hot IPO?
If I had asked you these questions in February, the answer surely would've been "yes."
I was personally flooded with these kinds of questions earlier this year. GameStop got things going... And then, the euphoria turned to other "meme stocks," cryptos, and just about anything else folks thought they could use to "get rich quick."
The story has changed dramatically since then, though... I haven't gotten any of these questions in months. No one seems to care anymore.
And in the case of the meme stocks, the data proves that out...
GameStop is still up more than 825% in 2021. But excitement around the stock is nowhere near the levels from earlier this year...
Just take a look at the Google Trends data below. It shows Google searches for GameStop's ticker "GME" over the past year...
Search interest in the stock has basically gone back to normal.
In other words, the casual market observer no longer cares... The get-rich-quick attitude that many first-time investors brought to the market isn't in the driver's seat anymore.
This may not sound like a big deal on its own. But it's pretty crazy when you consider the year we've had...
The S&P 500 Index – which excludes GameStop – is up roughly 15% so far this year. That strong rally has come on the back of huge earnings growth from market giants like Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN).
The U.S. economy is recovering, and the biggest companies are profiting from it.
Even with that reality, though...
The majority of American investors are once again very scared about the stock market...
In fact, CNN's "Fear & Greed Index" shows that we recently hit "Extreme Fear" levels for the first time since the bottom of the COVID-19 crash in 2020. Take a look...
And as we've seen throughout history, these moments of extreme pessimism and fear – like what we're seeing right now – make the best opportunities for investors...
We saw it back in 2009, when everyone was still too spooked to buy. And yet, it turned out to be the greatest buying opportunity in American history.
Of course, we saw it again in mid-2020, when COVID-19 was still casting a long shadow of pessimism over our country's economy. And yet, we all know what happened next...
Stocks went on to double off their March 2020 bottom.
Today, stocks are hated once again. This is a far cry from earlier this year when hundreds of thousands of new investors were creating brokerage accounts... every single day.
Remember that bull markets only end at moments of extreme euphoria and positivity. That's when there's no one left to buy.
But as I've said, we simply aren't seeing that right now.
That's why I've changed my Melt Down prediction. I no longer expect it to begin this year. Instead, the Melt Up should easily push into 2022.
And yes, I believe that in spite of the sky-high valuations in stocks today...
I realize that for many investors, valuations are a key reason to be fearful right now.
But in a Melt Up scenario, you don't have to ask yourself whether stocks are cheap relative to the rest of history... They never are.
Instead, here's what you must understand... Valuations alone don't kill bull markets.
Let me share my personal experience with this...
Back in 1994, I was working as an international broker. Stock prices had gone up for 12 out of the previous 13 years. And as you might guess, after that 13-year boom in stock prices, most rational people at that time thought prices couldn't go much higher.
But then, they did go higher... Stocks soared 38% in 1995.
Based on the S&P 500's cyclically adjusted price-to-earnings ("CAPE") ratio, stocks had only been that expensive two times in history – in 1929 and the late 1960s. Take a look...
Not unlike today, those two previous peaks were significant. The Great Depression followed the 1929 peak. And stocks shed nearly half their value in the 1970s after the late 1960s peak.
So in 1994 and 1995, any rational person would've said again that valuations were extreme. But after soaring 38% in 1995, stocks jumped another 23% in 1996. And that still wasn't the end of it...
Stocks soared another 33% in 1997. By the end of that year, stocks had become more expensive than at any time in history. Take a look...
That was a sure "sell" signal, right?
Nope.
Instead, what happened next shocked all rational people...
The S&P 500 went up 29% in 1998. And tech stocks went up even more... The tech-heavy Nasdaq Composite Index soared 40% that year. Finally, in 1999, the Nasdaq soared 86% before the top arrived.
That's why I think the worst mistake someone could make right now is selling simply because stocks are expensive.
Yes, the current CAPE ratio of 37 is high... But no, that alone won't cause a market crash.
The Melt Up is still in place. And the last thing you want is to be kicking yourself for the next 10 years after missing out on the biggest, fastest gains in the history of the stock market.
I'm not saying it will be easy. There will be some days... weeks... even months... where it will go against every instinct to not sell.
You're probably feeling that way right now...
The S&P 500 is around 5% off its all-time high. But we're in the middle of the worst fall of 2021. And plenty of scary headlines are floating around right now...
Evergrande – China's largest real estate developer – looks like it could go bankrupt. It has already missed two bond payments, and it's shedding assets to avoid missing more.
Interest rates have risen in recent weeks, too... The 10-year U.S. Treasury yield is up from around 1.2% in early August to about 1.5% today. Of course, when rates rise, it means more competition for stocks.
Plus, the Federal Reserve is likely about to begin "tapering" its asset purchases in the coming months. That will be one less piece of stimulus for stocks.
When you look at those headlines – and watch the market stutter a bit – it's easy to be fearful.
But in the end, it's critical for investors like us to ignore the daily ups and downs that make the mainstream headlines. Instead, we must always focus on the overall trend.
And overall, despite the recent swings, stocks are still in a powerful uptrend right now...
Again, the S&P 500 is up roughly 15% so far in 2021. And sentiment has swung from hugely positive to hugely negative along the way.
This sentiment shift tells me that stocks can go much higher from here. It's why I now expect the Melt Up to push into 2022. But to be fair, even I can't know the future.
That's why I urge you to set yourself up for success no matter what happens from here...
That means putting proper protections in place for your portfolio.
These protections will help you lock in profits and preserve your wealth if I'm wrong about the Melt Up... And at the same time, they'll allow you to let your winners run if I'm right.
I recently sat down with my colleagues Dan Ferris and Dave Eifrig to discuss the best way to do just that. While all three of us have different views on the market... different thoughts on what's happening today... and different opinions on where stocks are headed...
We all agree on the No. 1 way to protect yourself, no matter what happens next.
We discussed all these details and more during a special live event last week. If you missed our broadcast at the time, you're in luck... You can still watch the full replay right here.
Plus, just for tuning in, you'll learn the name and ticker symbol of a company that one expert believes is "the most dangerous stock in the world today." Check it out now.
Bitcoin vs. Beijing: Who Wins?
The Chinese government is focused on getting its economy back on track, True Wealth Opportunities: China analyst Brian Tycangco says... And cryptocurrencies are not part of the plan. He recently discussed the full story with our editor-at-large Daniela Cambone...
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.
New 52-week highs (as of 10/1/21): Black Stone Minerals (BSM), CBRE Group (CBRE), Continental Resources (CLR), Formula One Group (FWONA), JPMorgan Chase (JPM), Cheniere Energy (LNG), Mosaic (MOS), OptimizeRx (OPRX), Royal Dutch Shell (RDS-B), and Telekomunikasi Indonesia (TLK).
In today's mailbag, feedback on the "Take the Money and Run" art that our colleague Dan Ferris wrote about as part of Friday's Digest. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Hi Dan, Great essay about the state of 'Fine' Art.
"The words should actually read 'Fine Gullibility.' As an artist with a Bachelors of Art degree (grad. 1973), I felt urged to tell you that the old 'empty canvas' is nothing new at all.
"Mark Knopfler, the leader of the great rock group Dire Straits, wrote a song about this kind of gullibility. Actually it was a protest song against gallery owners.
"The words that Mark wrote for the song went thusly: 'and then you get an artist that doesn't want to work at all, he takes an empty canvas and sticks it on the wall.'
"Thanks for the great dedication in all the work you're doing for us all at Stansberry.
"Peace and most friendly regards." – Paid-up subscriber Ralph O.
Good investing,
Steve Sjuggerud Jacksonville, Florida October 4, 2021