A Shrug Could Be a Tell

Stocks have snapped back... A shrug could be a tell... History may rhyme again... What leads out of a bear market... Ready for a rally?... Watch our Stansberry Conference... It starts Monday...

---

The markets are answering...

Late last week, I (Corey McLaughlin) wrote here that the markets looked angry... Practically, longer-term bond yields were moving higher... and stock prices, on balance, were continuing a two-month trend lower.

We said we would continue to watch yields and other indicators to see if the long-term uptrend for stocks since last October would stick – or if a more serious sell-off could be afoot. I wrote last Thursday...

Some sentiment indicators are showing stocks are already at "oversold" levels, and the benchmark S&P 500 is sitting right above its 200-day moving average, the technical measure of a long-term trend. The index is also just above its previous highs around 4,200 in February, which could be a key "support" level.

Should stocks break below, though, look out.

Over the past few trading days, we've gotten an answer for the short-term at least... The S&P 500 Index has snapped back higher, and quickly. Those levels that we said could be technical "support" have acted as such. The benchmark U.S. index is up 2.5% since last Thursday's close... And all of a sudden, it's near its 50-day moving average...

At the same time, bond yields have moved generally lower in the past week...

Today's reaction...

It was more of the same this morning, even though an inflation indicator came in higher than Wall Street expectations (and, of course, war in the Middle East continues to develop).

The producer price index ("PPI") for September – a measure of business costs – grew 0.5%, higher than the 0.3% consensus estimate from economists. This was largely due to energy and oil prices. Yet investors had a mild reaction.

This could be an important tell.

We'll watch for how stocks and bonds react after tomorrow's consumer price index ("CPI") report, too. If there's a similar shrug, as our Ten Stock Trader editor Greg Diamond wrote to subscribers and Stansberry Alliance members today...

If stocks can't break down despite the inflation report, it likely means that stocks are looking past previous inflation numbers and are expecting "better" (lower) inflation numbers going forward.

Coincidentally, this lines up with exactly what happened this time last year... Inflation was higher, but stocks took it in stride with a low and a rally.

History may rhyme again, Greg said. Remember, stocks bottomed almost exactly one year ago, last October. That's when the "official" inflation numbers showed signs of finally slowing down, even though they were still high. Greg will have more for his subscribers tomorrow.

Was it hot coals or a garden?...

In the meantime, if you're wondering whether this is the end of the market's late summer/early fall swoon, consider a few facts...

The U.S. benchmark was down about 8% from its July highs through a low last week... and the market's "fear gauge" – the CBOE Volatility Index, or VIX – never closed higher than 20 through the entire period.

That's the stuff of "garden variety" corrections, though it understandably may feel like more in the moment. As I wrote in August, when stocks were beginning their move lower, uncertain markets are why it's important to have a plan and understand the goals of your investments, to keep your emotions in check. (Whatever the plan is, the important thing is having one and sticking to it over the long run.)

Here's what I said...

When I consider what has happened already and what could come next, I see a potential 10% hit before the S&P 500 would meet its longer-term average, which sometimes ends up aligning with a technical "support" level.

Back in the old days before the pandemic, during what was then a record-long bull market, a 10% pullback was considered a "garden variety" correction. No big deal.

It could end up being the same today... But given the current state of affairs in the U.S. – still-high inflation, continued monetary-policy uncertainty, perhaps more recession talk (and reality) ahead, lingering shell-shock from market performance in 2022, and polarized national politics getting back to the forefront – it might feel more like a walk on coals rather than a stroll in a garden.

Nobody can guarantee that a pullback is over. That's why weighing risk, upside, and downside is a more prudent move than predicting things. But I will say the recent market behavior so far aligns closely with the most relevant historical precedent...

Specifically, I'm looking at the high-inflation times of the late 1970s and early 1980s.

Within that period, there were two times when the yield curve started to "normalize" after being "inverted" for a long period of time like it has been now – for the past year and a half. In other words, these are times when longer-term yields begin a sustained path to being higher than short-term yields again.

We could get into the weeds about why this is happening, but the most useful point is that it is happening again right now. The 10-year/2-year spread is down to about minus-0.30 percentage points, from a low near minus-1% in July (and March)...

In the past, the S&P 500 sold off by about 13% in similar instances in 1980 and 1981.

The other part of this relevant history, though, is that an "official" recession followed... and stocks ultimately didn't bottom until the middle of the recession. But also consider that information moves a lot faster today than 40 years ago, and the Federal Reserve telegraphs policy much more today than decades ago. So...

As we weigh the future path for stocks...

I find myself thinking back to something Stansberry Research senior analyst Bryan Beach said during a free presentation earlier this year – that small-cap stocks have led the market out of every bear market in the past 90 years...

Said another way, if stocks are going to continue their march higher and the "worst" is really behind the markets – which indeed may be pricing in a long-awaited recession – small caps should rebound first. This hasn't exactly happened – yet...

As our colleague and DailyWealth Trader editor Chris Igou wrote on Monday, small caps (as represented by the Russell 2000 Index) have been in a technical trading "range" for about 10 months. The behavior has looked kind of like one long bottom to me. Chris wrote...

The chart below shows the sideways action in full swing. And we're at that low end of the range right now...

Since last August, the index has stalled around 2,000 before falling to roughly 1,720 three times.

This may look like a bunch of lines and numbers on a chart to you... But to Chris, it's a classic trading pattern. As Chris wrote, the "support" level of this range has held for 10 months, yet so has the upper "resistance" level...

The pattern I'm talking about is a sideways range. And it commonly happens in tough markets.

You'll see a level at which the stock rises and fails to break out higher. Think of this as a ceiling for prices. The bottom level is where prices stop falling and turn higher. We can call this a floor.

And when a stock bounces between the ceiling and the floor, you get your sideways pattern. The idea is to be cautious – or bearish – when stocks are trading at the ceiling. And you want to be bullish when they're trading near the floor.

Both strategies have been great for trading small caps since December. While these stocks are slightly down on the year, they've rallied double digits within that sideways chop.

Recently, small caps have been near the floor of their 10-month range, which Chris says suggests another double-digit run higher could be ahead. The Russell 2000 is up nearly 3% since its most recent low, but it's still double digits from the top end of its 10-month trading range.

After watching small-cap performance and other indicators over the past few days, today Chris recommended a bullish small-cap trade to his subscribers...

Existing DailyWealth Trader subscribers and Stansberry Alliance members can find Chris' entire analysis and trade recommendation here.

Bringing this out to a macro market analysis, veteran successful investors will say you never want to look at only one indicator... Just like we've been watching bond yields lately, our attention will also be on small caps for clues about where the broader stock market will head next.

One more thing before we go...

If you want to hear directly from our editors and analysts and hear their latest up-to-date takes on the market, one of your best opportunities is quickly approaching. Next week marks our annual Stansberry Research conference, our biggest event of the year.

Your favorite editors and analysts, along with an all-star lineup of invited guests, are gathering at the Encore at Wynn Las Vegas for three days of presentations, exclusive trade recommendations, and mingling.

This is your chance to hear directly from our team – folks like Dr. David "Doc" Eifrig, Dan Ferris, Eric Wade, Greg Diamond, Dave Lashmet, Brett Eversole, Alan Gula, our Director of Research Matt Weinschenk, and more...

Stansberry Research founder Porter Stansberry will also be live on stage. So will market analysts like Danielle DiMartino Booth, Josh Brown, Jared Dillian, Meb Faber, David Cervantes, Morgan Housel, and Lance Armstrong (yes, that Lance Armstrong).

In-person tickets are sold out, but you can still catch all the presentations via our livestream package. With livestream access, you'll also get access to video replays through the end of the year, so you can watch them as many times as you want, whenever you want.

Click here for more information on our livestream package, our speaker lineup, and more about what to expect next week. I will also have some live updates on the conference in the Digest next week, but your best bet to hear everything is to watch the livestream.

New 52-week highs (as of 10/10/23): CME Group (CME), Structure Therapeutics (GPCR), Omega Healthcare Investors (OHI), Qualys (QLYS), Sprouts Farmers Market (SFM), Shell (SHEL), and VMware (VMW).

In today's mailbag, a note for Dan Ferris, who offered a free recommendation in Friday's Digest... and feedback on yesterday's guest essay from Morgan Housel, who will be among the presenters at our Stansberry Conference next week in Las Vegas. Once again, in-person tickets are sold out to the conference, but livestream access is available. Click here for more details and to grab your digital ticket today.

"After reading Dan Ferris' free issue, I subscribed to The Ferris Report. Thanks, Dan, you are a stand-up guy." – Subscriber D.J.

"Awesome stories!

"I am 64 and when I was 19 my sister bought me my first Bible. When I first read about Solomon asking for wisdom from God above all else, I started praying daily for wisdom and still do to this day. Now, I do not claim to be the wisest, but I clearly see men my age and older who have no wisdom and still act like a bunch of boys in a junior high locker room... and that is in my church.

"Sometimes I think life would be easier being stupid and unaware. There is a responsibility to speak wisdom to men at church. I don't know how hated I am, but I will not stop." – Subscriber Paul M.

All the best,

Corey McLaughlin
Baltimore, Maryland
October 11, 2023