A Major Turning Point Could Be Here Now
A major turning point could be here now… Another big test for stocks… Investors are pessimistic again… Checking in on the market's 'vital signs'… Are we bullish or bearish?... You probably won't like the answer...
For months now, our colleague Greg Diamond has been warning about this...
Greg, a former Wall Street trader, has said the first half of 2018 could be a volatile – and potentially critical – time for the markets...
More specifically, Greg said that his work in technical analysis suggested we could see a major market turning point this spring.
Unfortunately, there was no way to know if it would be a bullish or bearish event. It could be a top, which would be followed by a significant market decline... or it could be a bottom, which could kick off the "
However, while he couldn't predict the outcome, he believed this turning point was most likely to occur in late April or early May.
Of course, that's exactly where we are today...
And regardless of your thoughts on technical analysis, you can't deny Greg's forecast appears remarkably prescient so far.
In the past couple months, we've seen stock market volatility explode higher for the first time in nearly five years... the first official correction of 10% or more in over two years... and the market's first "test" of its 200-day moving average ("DMA") since the November 2016 presidential election.
So where do we stand today?
Our answer is sure to lead to
We still can't be certain.
The reality is there is evidence to support both the bullish and bearish arguments today.
Let's start with the negatives...
Regular Digest readers know the market is historically expensive by a number of common valuation metrics. Whether it's price-to-earnings, price-to-sales, price-to-book, or market capitalization-to-GDP (Warren Buffett's favorite indicator), the market is trading at or near its most extreme valuation in history.
You also know the Federal Reserve is now unwinding its unprecedented stimulus efforts for the first time. The "tide" is officially going out.
But there are other reasons for concern...
Yesterday, the yield on benchmark 10-year U.S. Treasury notes – which influences borrowing costs across the entire economy – "broke out" above the widely watched 3% level for the first time in four years.
Interest rates have been quietly climbing higher for nearly two years. But suddenly, the market is paying attention. And for good reason...
According to several notable analysts – including "Bond God" Jeffrey Gundlach – this breakout suggests the
Historically, rising rates haven't necessarily been bearish for stocks. But they could be a significant headwind for today's debt-fueled economy. As Porter explained in the January 12 Digest earlier this year...
You can think of the yield of the 10-year Treasury bond as a kind of gas pedal for the price of global financial assets.
The lower it goes, the more gas is being sent into financial markets. But as the pedal rises, those carburetors are getting less and less fuel... and the motor is going to slow...
The resulting impact on financial markets won't be immediate. It isn't direct. But it is, like gravity, irresistible. The Fed's actions and the resulting higher interest rates are going to eventually put a "pin" in the global financial bubble. The clock is ticking.
We've already discussed the recent reaction to corporate earnings...
As we mentioned yesterday, for the first time in years companies are being punished for anything but perfect results. This is a potentially important "tell" for the market.
Thanks to the recent tax cuts, many companies experienced a big bump in first-quarter profits. But this boost is unlikely to be repeated... which means the market could be discounting a peak in corporate earnings.
Finally, the market is 'testing' important support again...
The S&P 500 Index first tested its 200-DMA on an intraday basis back in February.
It then tested it on a closing basis in March.
And as you can see in the chart below, it's now sitting right above this important level again today...
Why is this important? Because in general, the more times a level is tested, the weaker it becomes. Which makes this latest test particularly important.
But again, there are reasons for optimism as well...
First, several notable measures of investor sentiment are at extremes that typically coincide with stock market bottoms, rather than tops.
For example, the Conference Board just released the April edition of its Consumer Confidence Survey. It showed Americans have turned net bearish on stocks for the first time since the November 2016 election.
According to the report, more Americans now expect stocks to fall over the next 12 months than expect them to rise.
This may not sound noteworthy, but this type of negative reading is rare. Since the end of the financial crisis, virtually every other similar occurrence has marked a bottom in stocks.
But it isn't just "mom and
In addition, the longer-term market 'vital signs' remain bullish today...
As Steve Sjuggerud explained to his subscribers in the April issue of True Wealth last Friday...
Our "early warning" indicators look just great... No red flags. We've talked about some of these in the past. Looking at key measures in the markets and economy can give us a sense of the bull market's "vital signs."
For example, look at the advance/decline line – one of our favorite early warning indicators. It shows the number of advancing stocks in a day minus the number of declining stocks – in other words, when the line goes up more stocks are rising than falling, and vice versa. Today, this indicator is approaching new highs...
Often, the advance/decline line starts to fall in advance of a stock market fall. It started falling over a year before the dot-com bust in 2000. As you can see today, this is not a problem at all right now.
And again, each of Steve's other trusted early-warning indicators
So at the risk of upsetting thousands and thousands of readers, we'll say it again...
There is plenty of evidence to support both the bullish and bearish cases for stocks today.
For now, we remain cautiously bullish... As always, we have no crystal ball. But this bull market has proven the bears wrong numerous times over the past nine years, so we wouldn't be surprised to see it continue awhile longer.
Our advice remains the same. Stay long, but stay smart... and you'll be positioned to do well no matter what comes next.
Oh, and for the record, Greg agrees...
He isn't certain which way the market will break, either. But he believes we'll know within the next couple of weeks. And more important, he says he's prepared to help his Ten Stock Trader subscribers earn big short-term profits either way. Given his perfectly executed one-day, 25% gain last week, we wouldn't bet against him.
In the meantime, if you're not already a Ten Stock Trader subscriber, it's not too late to try it for yourself. For just a few more days, you can still "beta test" Greg's new service for up to 85% off what others will pay when we launch to the public later this year. Click here for all the details.
New 52-week highs (as of 4/24/18): Sprott (SII.TO).
In today's mailbag: Kudos for our beleaguered Big Trade strategy... and a subscriber is getting worried. What's on your mind? Let us know at feedback@stansberryresearch.com.
"Kudos to Stansberry Research... I utilized the strategy I learned from Stansberry's Big Trade and implemented it on John Deere. Bought the Jan 2020 $130 strike put several weeks ago... Up 54% as of yesterday!
"I never would I have had the courage to buy options... let alone put options had I not subscribed to Big Trade." – Paid-up subscriber Austin D.
Brill comment: Thanks for the note, Austin. The Big Trade strategy has certainly not yet performed as well as we had hoped to date. But we were clear that we could suffer several short-term losses along the way until the credit cycle finally rolled over. This is why we advised subscribers to follow strict position-sizing limits and to build positions over time.
But as your experience shows, this strategy can be a powerful way to "hedge" your portfolio. And we still expect it will eventually pay off handsomely for patient subscribers.
"I'm finally getting nervous at this stage. Is it time to continue raising cash or do I start looking for deals on dips?" – Paid-up subscriber Steve F.
Brill comment: As always, we're unable to provide individual advice… but in general, we don't believe it's an "
Likewise, just because the broad markets are generally expensive, that doesn't mean there aren't opportunities to put new money to work. Despite their caution, even Porter and his team of analysts have continued to make new long recommendations in recent months... They've just been more selective about it.
Regards,
Justin Brill
Baltimore, Maryland
April 25, 2018