A Big Test for Gold

The odds of a December rate hike are soaring... A Fed trade with a 100% success rate... Japan pledges to stick with quantitative easing... Sjug's bold call continues to play out as predicted... A big test for gold...

The odds of a December rate hike are soaring...

According to CME Group's FedWatch tool, there is now an 87% chance the Federal Reserve will raise interest rates again at its policy meeting in December. This is up from just 30% one month ago.

Despite less-than-stellar economic data and inflation that remains below its official target, it appears the Fed's "tightening cycle" will continue.

We continue to believe the central bank will eventually be forced to reverse course and begin easing again. But for now, short-term rates are likely headed higher. And this could present an interesting trading opportunity into year-end...

'This trade works 100% of the time'...

According to market-analytics firm Kensho, banks and financial stocks have outperformed the market ahead of every December rate hike since 1990.

Admittedly, it's a small sample size, with just four December rate hikes over that period. But financials soared ahead of each of them. They were up an average of more than 10% in the two months prior, compared with positive returns just 62% of the time ahead of all Fed interest-rate increases.

Regular Digest readers know financials have already been moving higher recently as the "Trump Trade" has suddenly resumed. The S&P 500 Financials Index is up more than 7% over the past month alone. But history suggests bigger gains lie ahead.

While the Fed is determined to tighten, Japan's central bank continues to ease...

Just this morning, Bank of Japan ("BoJ") governor Haruhiko Kuroda reaffirmed his commitment to continue easing as long as necessary to push inflation higher. As news service Reuters reported...

The BoJ raised its assessment of four of the country's regional economies due to strong exports, consumer spending and construction, an encouraging sign that the broader economy can continue to grow at a healthy pace.

Kuroda on Tuesday reiterated the central bank's resolve to maintain its massive stimulus program until inflation moved sustainably above its 2% price target.

While Kuroda expects price inflation to "gradually accelerate" toward 2%, the data still show little sign of cooperation.

Japanese core consumer prices rose at just a 0.7% annualized rate in August, and haven't eclipsed even 1% in more than two years.

In other words, don't expect Japan to stop easing anytime soon.

This shouldn't be a surprise to Steve Sjuggerud's readers...

In the December 2016 issue of True Wealth, Steve explained that Kuroda was worried that Japan was falling back into deflation. And Steve was sure Kuroda would do anything he could to keep that from happening. From the issue...

In his speech earlier this week, he made it crystal clear that he is pulling out all the stops to "reflate" Japan's economy...

"Extremely powerful economic stimulus measures are being implemented, both on the monetary and fiscal sides," Kuroda told the crowd in Nagoya...

Kuroda wants interest rates of 0%. And he wants inflation rates of 2%. He is going to "overshoot" on both of these. He won't be happy until inflation is over 2% and interest rates are at less than zero.

Regardless whether these policies would actually help the real Japanese economy, Steve was certain they would be a boon for Japanese stocks. As he explained...

When you think about it, what he wants is for the typical Japanese investor to lose money (compared with inflation) by leaving his money in the bank. He is forcing money out of cash and out of bonds. What can Japanese investors do? Where can the money go?

One sure place is the stock market... Kuroda won't stop at influencing short- and long-term interest rates. He will also influence the stock market...

A Bloomberg headline a couple weeks ago said: "Owning Half of Japan's ETF Market Might Not Be Enough for Kuroda." Its first sentence read: "Japan's central bank already owns more than half of the nation's market for exchange-traded stock funds, and that might just be the start."

Now to be clear, Steve wasn't advocating this strategy. As he explained, government intervention typically ends badly. But in this case, it had created a short-term opportunity that was too good to ignore...

In the long run, this will be bad... as all of those exchange-traded funds (ETFs) Kuroda bought will have to be sold someday. But not today. Right now, this creates a "backstop" for any downside risk. Kuroda buys on days that the market opens lower.

All this action by Kuroda creates a fantastic opportunity for us. We know Japanese investors are being heavily penalized for having money in the bank or in bonds (losing money to inflation in both cases). And we know Japanese investors are being heavily "encouraged" to invest in stocks – with Kuroda protecting their downside risk.

A chance to buy stocks at '1986 prices'...

Despite the nearly guaranteed upside in Japanese stocks at the time, Steve noticed that almost no one was interested. Japanese stocks were still incredibly cheap. More from the issue...

Today in the U.S., the Dow Jones stock index is at all-time highs of more than 18,000... The less-talked-about Nikkei 225 stock index is also near 18,000. It's nearing nine-month highs. The Dow Jones index and the Nikkei 225 index haven't always been around the same value, like they are today...

On the last day of 1989, the Dow Jones stock index was around 2,750. On that same day, the Nikkei 225 index was – get this – around 39,000. These two were so far apart, it was hard to ever imagine them crossing.

Since then, Steve noted, the Dow Jones Index had risen almost 1,200%, including dividends. Meanwhile, the Nikkei 225 Index was down 55% from 1989 through the end of 2016. From the issue...

One group of stocks is up over 1,100%, including dividends. Another group of stocks is down 55% across a quarter-century-plus. After a massive gain in one index, and a massive fall in the other, which group of stocks do you think would be cheaper today? The Dow Jones in the U.S.? Or the Nikkei 225?

This question is too easy. The Nikkei is incredibly cheap... Today, it is trading around 17,000. In 1986, it was also trading around 17,000. It's not often you can buy things at 1986 prices – back when a box of Corn Flakes cereal was just $1. But you can buy at 1986 prices today, with Japanese stocks.

Steve's call has been spot-on so far. His preferred Japanese fund – the WisdomTree Japan Hedged Equity Fund (DXJ) – just jumped to a fresh 52-week high today. True Wealth subscribers who took Steve's advice are now up nearly 20% in less than a year.

What's up with gold?

Regular readers know our colleague Ben Morris has been watching gold closely for months.

And in late August, he finally got the confirmation he was looking for...

The precious metal finally broke out of a massive, decade-long "wedge" pattern. This was an extremely bullish sign, and Ben told his DailyWealth Trader subscribers it was finally time to trade gold from the long side.

Gold moved higher almost immediately. It jumped nearly 3% over the next eight trading days. But the rally didn't last long...

Gold has been slowly moving lower ever since, and is now down nearly 6% over past month. And many gold bulls are starting to get worried.

If you're among them, Ben has some good news. He says gold's recent weakness is normal and natural. In fact, if you missed the big breakout in August, he believes this is could be a great second chance to buy. As he explained to his DailyWealth Trader subscribers on Monday...

To see the opportunity in gold, you'll need to understand two of the simplest – and most important – concepts in chart-reading...

"Support" is a level at which folks tend to buy an asset and prices often stop falling. "Resistance" is a level at which folks tend to sell and prices often stop rising.

On a chart, we can draw support and resistance levels as lines. They can be perfectly horizontal... They can be diagonal... And they can even curve. (For example, the 200-day moving average can serve as support or resistance.)

When an asset breaks down through support, the support line becomes resistance... And the asset will likely continue lower. When an asset breaks out above resistance, the resistance line turns into support... And the asset will likely continue higher.

One important caveat...

After an asset breaks through its support or resistance, it will often temporarily reverse course and "test" its breakout point before reversing again and starting a bigger move. And that's exactly what gold is doing now. More from Ben...

With this in mind, let's look at gold's former resistance line, which – because gold broke through it – now serves as support. As you can see, gold closed right at support on Friday...

Support and resistance lines are rarely perfect. We have a little flexibility in how we draw them... And assets often overshoot a little bit.

But gold clearly broke out of its downtrend in late August. And now, it is testing its breakout point. Again, this action is normal.

Ben shared a recent example of another DailyWealth Trader recommendation to illustrate how this scenario often plays out...

In early May, we bought Chinese Internet giant Baidu (BIDU) after it broke out of a multiyear wedge. It, too, climbed higher... then pulled back to its breakout point.

In the chart below, you can see what happened next...

We were down on the position for a week or so. But Baidu ripped higher right after retesting its breakout point. We're now up 40%.

As we often say, the market is unpredictable...

We can't assume gold will follow a similar path. But this chart says the bullish case for gold remains intact... and traders have a low-risk opportunity to buy today. More from Ben...

A 10%-20% move higher from here is possible. And even a 10% move would put gold at a four-year high... just above the psychologically important level of $1,400 per ounce. If that happens, other gold-related assets like gold stocks and silver will likely soar as well.

In sum, gold has been weak over the past month. But after its recent move higher, that's to be expected. It's now testing its breakout point... And if support holds, a big move higher is likely in the cards.

New 52-week highs (as of 10/9/17): AbbVie (ABBV), AMETEK (AME), American Express (AXP), Alibaba (BABA), Baidu (BIDU), Berkshire Hathaway (BRK-B), Euronet Worldwide (EEFT), iShares MSCI Japan Fund (EWJ), Huntington Ingalls Industries (HII), Intel (INTC), ETFMG Prime Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), Lockheed Martin (LMT), Microsoft (MSFT), ProShares Ultra Technology Fund (ROM), and Invesco High Income Trust II (VLT).

In today's mailbag, more feedback on Porter's Friday Digest, and a subscriber has a question about trailing stops. Send your questions and comments to feedback@stansberryresearch.com. As always, we can't respond to every email – and we're prohibited from providing individual investment advice – but we read every one.

"Porter, another epic Friday Digest. I printed this one off for my kids to read and LEARN from. They're too young to understand now but hopefully when they are in their teens they'll take your advice... to heart... I hope and pray my children LEARN from 'the right information' and take advantage of big opportunities that come their way. Thanks for all the LEARNING you bring to your subscribers Porter. God bless you." – Paid-up subscriber Matt Vestrand

"Great information... But straight-up financial information is not only hard to find, but often difficult to recognize. After many years of subscriptions to different financial news providers, I've become very leery of 'My research is the only one because...' After a short time I realized many were not much more than a platform to lure subscribers into additional 'specialized' costly events or subscriptions under the rationalization that this tactic is important to GROW our Business.

"Now it is understood that there are many aspects for successful financial investing, many of which are in a state of change. So timely information and 'The Right Information' is critical. I am a strong believer and ardent student of lifelong learning, especially in terms of my wellbeing: be it physical, mental, spiritual or financial. Stansberry Research plays an important role in my efforts." – Paid-up subscriber Dwight G.

"I am a True Wealth subscriber and investor in several of your recommendations. I appreciate your analyses and practical approach to investing. In the past I had stops on all my stocks, however I lost thousands of dollars when the market dropped substantially due to a 'glitch,' just to rebound shortly afterwards. I assume trailing stops would have reacted similarly under the same circumstances. Since my big loss, I eliminated all my stops; instead I follow the markets closely and respond accordingly. Given a possible repeat of another market 'glitch,' how would trailing stops protect my investments? Thank you for responding to my question." – Paid-up subscriber Johan L.

Brill comment: Again, we can't provide individual investment advice, but it seems you've missed two critical points about our trailing-stop strategy.

First, we base our stops on closing prices rather than intraday prices. Second, we never recommend placing stop loss orders or sharing your stops with your broker.

Instead, if we recommend tracking your stops outside the market. You can do this by hand or preferably, via software like our friend Dr. Richard Smith's excellent TradeStops service. When a stock closes below its stop, you simply place an order to sell the position the following day.

Regards,

Justin Brill
Baltimore, Maryland
October 10, 2017