A Notable Divergence Between the U.S. and China
A classic 'bad to less bad' situation... Our proprietary Complacency Indicator remains bearish today... A notable divergence between the U.S. and China... A long-awaited 'breather' could be here now...
Last week, we highlighted the recent turnaround in Chinese stocks...
In short, after leading global markets to the downside for much of last year, Chinese stocks are once again outperforming their counterparts in the U.S. and other developed markets.
This is a bullish sign. And while we can point to a number of potential reasons for this turnaround – ranging from positive trade talks to the impending launch of the "Chinese Nasdaq" our colleague Steve Sjuggerud mentioned last week – one of the most important is also the simplest. As the Wall Street Journal noted over the weekend (emphasis added)...
Chinese stocks have just clocked their best first two months of the year since the global financial crisis, and have outpaced the rest of the world, despite a cloud of bad news about the country's economy and the region's political stability...
At the end of last year, Chinese stocks were braced for awful news, and things turned out not nearly so bad... Prices collapsed and valuations tumbled to crisis levels. Then this year, the outlook improved slightly, and investors bought into those devalued stocks.
This situation should sound familiar to longtime readers...
It's a textbook example of one of Steve's "bad to less bad" trades.
Domestic Chinese stocks – known as "A-shares" – were priced for utter disaster. They're now soaring, as the news has been just a little "less bad" than originally feared. And despite the big rally so far this year, these stocks still have plenty of room to run. More from the Journal...
Chinese domestic stocks are still fairly cheap, even after their big gains. [The] Shenzhen [Stock Exchange] trades at a multiple of 14.5 times estimated 12-month-ahead earnings, according to Refinitiv, having reached its lowest since 2008 at the end of December. [The] Shanghai [Stock Exchange], at 10.1 times, is still cheaper than its 2008 low...
The same can't necessarily be said for the U.S., however...
Unlike Chinese stocks, U.S. stocks – as represented by the benchmark S&P 500 Index – have already recaptured most of last year's declines. And by most measures, valuations remain near their highest in history.
We'll also remind you that even during the worst of the decline last fall, our proprietary Complacency Indicator showed investors remained dangerously complacent. And as the Stansberry's Investment Advisory team just noted in their latest issue, published on Friday, that remains the case today...
Since hitting its most recent low on December 24, the benchmark S&P 500 Index has rallied more than 18%. But our Complacency Indicator is telling us that more downside may be ahead...
This month, it reads 27. That's up one notch from 26 last month. So it's still giving us a "bearish" reading. The indicator has given us a complacency score of less than 30 during every month since the start of August last year.
Given these facts, it may be worth noting a recent development...
You see, these two markets "diverged" following the latest trade news this weekend...
The benchmark Shanghai Stock Exchange Composite Index rallied more than 1% today on reports that the U.S. and China are now in the "final stage" of completing a trade deal.
However, after an initial move higher, U.S. stocks reversed and closed lower today. The S&P 500 closed at 2,793... about 0.4% below Friday's close of 2,803.
Regular readers know the market is long overdue for a "breather," at a minimum. Today's decline could be the start of that move. Stay tuned.
New 52-week highs (as of 3/1/19): Automatic Data Processing (ADP), Hershey (HSY), Kinder Morgan (KMI), Motorola Solutions (MSI), New York Times (NYT), Spirit AeroSystems (SPR), and W.R. Berkley (WRB).
In today's mailbag: A wonderful note from a new Stansberry Alliance member... and several readers weigh in on Friday's Digest about synthetic diamonds. As always, send your notes to feedback@stansberryresearch.com.
"For all of you at Stansberry Research, now that I have become an Alliance member I realize that I waited too long. I was solicited for the last couple of years. This year I realized that I could no longer grow beyond the level I have been trading at without better resources. In the past I have cringed at the cost. But this year I knew that I had to do it or just stay at the level I have been trading at.
"Knowing that there were newsletters that I wanted and that would help me grow I kind of added up the costs for the various ones and realized that I wasn't that far from the Alliance membership. Not to mention the advantage of being able to see everything.
The other day... I realized that I have gotten to a higher level in a very short time... I want to thank all of you for the knowledge and skills that you have given me in the 4 years that I have been a subscriber. Yes, it took awhile for me to get to Alliance. But that change has moved me along because of the broadened vision that it has given me." – Paid-up Stansberry Alliance member Jeff S.
"Dear Bill, you will probably hear this many times. I own a jewelry store. DeBeers plan will surely be to lower the price of synthetically produced diamonds to a level that prohibits the 'little guys' from staying in business. At that time most likely DeBeers will put the product in the drug stores, flea markets and dollar stores. No way they want this trend of lab created stuff to compete with a product that costs billions to mine." – Paid-up subscriber Steve S.
"I own a 1.01 karat fancy intense VS2 GIA certified yellow diamond as an alternative investment and I wonder what synthetic diamonds will do to that market. My purchase wasn't a speculative play but similar to those that hold gold bullion in hopes they never need to use it." – Paid-up subscriber Dave D.
"Yes. I have bought a synthetic diamond and several other lab gemstones. It is impossible to tell them with the naked eye. Even under a microscope, they are not easily distinguished." – Paid-up subscriber R.J.
"If I was wearing a man made diamond that cost a lot less I would think it was cheap. I own a 3.25 real diamond and I know that I finally made it when you can afford the real thing and not a man made cheaper diamond. If you got it flaunt it, you can not feel you made it with a cheap substitute." – Paid-up subscriber Jim K.
Brill comment: To each his own, Jim...
Regards,
Justin Brill
Baltimore, Maryland
March 4, 2019