Why you need to be careful today... 'On the verge of a bear market'... Why the market is 'guilty until proven innocent'... Three things to remember...
Regular Digest readers know we've been "cautiously bullish" for months...
While there were plenty of reasons for concern, the long-term trend in stocks remained up. But following the recent selloff, we believe it's time to be more careful.
In short, the decline caused the market to become extremely "oversold." So a short-term rally or consolidation – a period of back-and-forth movement over a small range – is likely. But as we've discussed, the selloff has now put the six-year uptrend in U.S. stocks in question.
Last week, we shared why our colleague Jeff Clark was concerned that a more serious decline could be coming. In particular, Jeff pointed to a monthly chart of the benchmark S&P 500 Index. Here's Jeff from the August 27 Digest...
Take a look at this monthly chart of the S&P 500 plotted against its 20-month exponential moving average (EMA)...
I use the 20-month EMA as the defining line between bull and bear markets. If the S&P 500 is trading above the line, stocks are in a bull market. If the index dips below the line, the bears are in charge.
The red circles on the chart show the starts of the bear markets in 2000 and 2007. They both started as the S&P 500 closed below its 20-month EMA, and a few months after the moving average convergence divergence (MACD) momentum indicator turned lower from an extended position.
The red arrows point to the MACD reversals. This indicator gave investors fair warning back in 2000 and 2007. It's giving us a good warning this time as well. The MACD indicator turned lower a few months ago. And the selloff in the stock market over the past week has pushed the S&P 500 below its 20-month EMA.
As we noted at the time, this isn't a reason to get aggressively bearish.
The signal hadn't officially "triggered" (the monthly price for August wouldn't "close" until Monday, August 31). And even the most reliable signals don't work all the time.
But again, it was another reason for caution.
Jeff updated his thoughts on the signal for his Stansberry Short Report subscribers yesterday...
Here's how we finished August...
The S&P 500 closed Monday at 1,972 – just four points above its 20-month EMA. For now, the bull market continues. But it's in a precarious position.
The 20-month EMA is rising. So the S&P 500 needs to gain ground in September to remain above the line. Based on the short-term setup, I don't think that's going to happen. Instead, I expect the S&P 500 will finish September below its 20-month EMA and kick off a new bear market.
Now is NOT the time to be adding aggressively to long positions. Now is the time to be tightening stops and raising cash by taking profits as the stock market bounces.
As always, it's important to remember that Jeff is a trader...
As editor of the Stansberry Short Report and Stansberry Pro Trader advisories, he focuses mostly on short- to intermediate-term positions – trades that last days or weeks, rather than longer time frames (like Dr. David Eifrig and Dan Ferris specialize in). As we reminded readers last week...
By definition, traders are different than investors. They're more "nimble." They often buy and sell more often, use "tighter" stops, and look to make quick profits from small moves.
So while "common sense technical analysis" can be useful, we think it's a mistake for most investors to spend too much time looking at charts. Most folks would be much better off using their time to learn what makes for a great business and how to properly manage risk instead.
Even if Jeff is correct about a new bear market in the major U.S. stock indexes, it's not necessarily a reason for long-term investors to sell individual positions. That's why we use proper position sizing and trailing stops.
But it is a good reason to limit new purchases to only the highest-quality stocks in the meantime.
Stansberry Research Editor in Chief Brian Hunt is also concerned. In today's issue of DailyWealth Trader, he explained why the market is now "guilty until proven innocent"...
Given the old age of the market, the rich valuations, and the major trend damage, we believe that the stock market must "prove" its strength... Until the market does this, it should be approached with extreme caution. You could look at it like a court case where the burden of proof has been flip-flopped. The stock market is guilty until proven innocent.
To be clear, I'm not saying the market is going to crash this month. I'm not saying the market is going to crash next month. I'm not saying the market is going to crash at all.
I'm simply saying that serious damage has been done to the market's primary trend... The market could trade sideways for a year. It could decline 20% in the next year. I can't know what it will do... and neither can anyone else. But I can urge our readers to be extremely cautious toward the market.
So what does Brian think investors should do? His advice will sound familiar to regular Digest readers...
First and foremost, make sure you're using intelligent asset allocation. This means keeping a diversified mix of cash, bonds, real estate, gold, stocks, and speculations. Using intelligent asset allocation will prevent you from suffering a catastrophic loss if one asset experiences a big drop.
Second, realize that if you own high-quality businesses you purchased years ago for good prices, you don't need to do anything. You can sit tight, knowing these high-quality businesses will hold up well during any environment we'll see in the coming years (just as they've done in the past).
Third, if you're considering new stock purchases, please make sure they are in very high-quality businesses trading for good prices. This isn't the time to pay 50 times earnings for a tech company with a big dream and lots of competitors. Instead of buying riskier businesses, consider holding off on new purchases. If you have cash that has been building up in your account, sit on it.
Again, we can't know for sure where the market is headed next...
While further declines appear likely today, there is bullish potential as well. It's possible this correction could play out similar to the last one in 2011.
Fortunately, we don't have to know...
If the market heads lower from here, a commitment to proper position sizing and trailing stop losses will protect your capital and make sure you have plenty of cash to pick up bargains at the bottom.
On the other hand, if stocks recover from here, you'll still be holding your highest-quality stocks... and have cash available to buy new opportunities that are sure to develop.
New 52-week highs (as of 9/1/15): none.
In today's mailbag, several notes of praise for Porter's Friday Digest. Send your questions and comments to feedback@stansberryresearch.com. Please note, we can't respond to every e-mail, but we read them all.
"I was completely in mutual funds during the 2007-8 mess. I just let things ride and I managed to get out pretty much in one piece. After things recovered I looked at the performance of the various funds I was in and saw that they did nothing. Why didn't they sell when the coming crash was so obvious – even to a novice like myself. I finally realized that they didn't care because it wasn't their money they were handling. So I decided to take matters into my own hands. I finally found Stansberry Research and became a Flex Alliance member. I learned a lot and decided to become a full Alliance member. You have taught me a lot and now rather than panicking, I'm sitting on mostly cash with an ear to ear grin." – Paid-up subscriber E.H.
"Porter, thank you for your endless determination to pound the table on all of these ideas. They have changed my life (personally & financially). You are a fantastic teacher to those willing to learn. I was elated on Friday & Monday and eagerly bought a little bit of what I knew was cheap because I had cash ready. Please know that for every few crazy people you have to deal with there is at least one grateful subscriber. I missed you in Vancouver (although I had the opportunity to have dinner with Steve & his lovely wife) and am looking forward to thanking you in person in October for all you have done for me. Proud S&A Alliance Member, #23 OneBlade Owner, and Stansberry Radio Long-Armer." – Paid-up subscriber Jesse Haro
"Porter, I hadn't thought about selling panics such as we saw last week as 'determined' selling, but don't think that just because it is determined that it isn't panicked. The distinction you make bears some further consideration though. What I hadn't ever considered though was being frozen and thus prevented (or self-limited) from pulling the trigger when it's time to get back in as a panic, even though I've experienced that LOTS of times. I need to factor that into my thinking, because I have passed up on so many good trades in various markets (besides the usual markets your people talk about, I also trade forex) that were such good entries with tight technical stops and quite a ways to run." – Paid-up subscriber Keith Snyder
"Totally agree with your analysis. I stayed invested back in '09 and have enjoyed robust returns since. Am adding to cash now. Diversifying & position sizing are keys – I use mental stops but rarely have had to (exception: Corning in last month). Once looked at Freeport-McMoRan, held off and was glad I was patient... now looking at it again." – Paid-up subscriber Jim S.
Regards,
Justin Brill
Baltimore, Maryland
September 2, 2015
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