An Elixir for a Nasty Day

Stocks sell off (again)... A simple to-do list... An elixir for a nasty day... What's the deal with banks?... When a little detail makes all the difference... Beware the 'death cross'... Last call for Doc's 'income surge' offer...

Today was a nasty day in the markets – if you weren't prepared...

The major U.S. stock indexes were each off by more than 2%. The tech-heavy Nasdaq Composite Index lost the most value, down 4%, and hit a new low for the year... And like yesterday, the market's "fear gauge" – as measured by the CBOE Volatility Index ("VIX") – spiked again by double-digits.

I (Corey McLaughlin) won't sugarcoat it. It's getting nasty out there... And I'm not saying this so we can go back and take a victory lap one day. No, it's what I would tell anyone about stocks today if they asked... like my snack-stealing family member did in January.

Regular readers might remember him... He wanted to know what the heck was going on with stocks, following a wild day watching his brokerage account endure big swings.

Back then, many of the same names that saw massive gains from the COVID-19 lows were crashing that morning... The major indexes were down 4%, only to finish the day slightly positive... His portfolio did the same.

I wrote in the January 25 Digest what I told my family member that night... "Stop eating our snacks, and don't ignore the 'warning shot' that Mr. Market just sent."

This market behavior was a peculiar, massive intraday "reversal," one that occurred in the benchmark S&P 500 Index for only the third time ever in recorded history.

The other two instances happened in October 2008... in the runup to the worst of the financial crisis. History doesn't always repeat, but I could tell that something wasn't right.

At the very least, the market behavior suggested more big swings to come...

And with a pair of indicators like that, we sought the advice of our colleague and Ten Stock Trader editor Greg Diamond, who was warning about 2022 being a year defined by volatility. We summed it up like this on January 25...

What happened yesterday might be a final warning that you want to ready your portfolio for the "unexpected"... In the meantime, don't try to predict what the unexpected will look like or when it will happen.

Just prepare. Manage your risk. Heed your stop losses. Own a diversified portfolio featuring high-quality stocks of capital-efficient companies... and don't get "out over your skis" in any one sector or position.

As we've been saying, this is going to be a volatile year...

Since writing the above, the major U.S. indexes are down anywhere from 4% to 8%. Yesterday, we saw another intraday reversal to the upside, but still within a longer downtrend, shown today. And our thoughts remain the same...

I don't know if this will be a popular message among all of my colleagues or well-received by you, but it's what I would want to hear if our roles were reversed. Be prepared for more volatility ahead for U.S. stocks...

And take action if you must.

A simple to-do list...

You don't need to sit around and watch the value of your savings fall 20%, 50%, or more in a conventional 60-40 stock-bond portfolio or similar passive strategy in what could be the start of a bear market... and impending recession.

We've documented the warnings that suggest the possibility of a recession... yield-curve inversion, oil shock, falling consumer sentiment. But here's some good news, you can actually come out of whatever happens next in a great position...

If you're reading this, you're already ahead of 99% of other people when it comes to their money... And longtime subscribers have likely already prepared for the possible outcomes I'm talking about.

But, if not, as we said yesterday, there are a few simple moves anyone can make to avoid stock-selloff anxiety while also saving yourself some money for when times are better and most other investors might be panicked.

If you are concerned...

Raising cash should be first thing on your "to-do" list. You'll preserve capital, which you can deploy into great buying opportunities when they present themselves... and they will. Or you can put your money to work elsewhere right now...

Specifically, you could make a few targeted short trades, of the kind Greg has been recommending lately in his Ten Stock Trader advisory. He has been positioning subscribers for a bear market since last fall...

But, please, if you've never shorted a stock before, don't go out and make the first trade that sounds appealing to you that you might find on some random website. Know what you're doing... Follow a trusted guide. If you do, a relatively small, well-timed and researched bet could pay off big time...

Today, for instance, a bearish bet that Greg recommended on small-cap stocks on Friday afternoon shot up by roughly 40% while the market was down. That's an elixir for a nasty day... and a way to survive a troubling market.

On that point, Greg and our colleague Jeff Havenstein will have advice on how you can short the market – and profit from a market crash – in the fourth module of our new Stansberry's Financial Survival Program. That is publishing this Friday.

Existing subscribers and Stansberry Alliance members, stay tuned to your inbox after Friday's close for the details. And if you haven't yet signed up to access this seven-part program, now is the perfect time. Click here for more information.

The relatively small cost of the program is one that could easily pay for itself if you put to work any one of the seven strategies our team is sharing, much less all of them. We've published three lessons already... and four more will come weekly for the next month.

Moving on, let's get back to your thoughts on inflation...

Two weeks ago, I asked what your current thoughts were on inflation, and we want to try to get to as many of your comments about it as possible...

Thank you to everyone who has written in on the topic. Your feedback has led us to a few interesting places already, like the trouble on American railroads, the soaring costs on farms... and today, as you'll see, the financial sector.

Keep your comments, concerns, and questions coming... As always, e-mail your notes to feedback@stansberryresearch.com. We can't provide individual investment advice, but we'll talk about as much as we can.

Today, we'll focus on a question from paid-up subscriber John M...

Corey, great question which should generate responses.

I'm a retired 76-year-old married male. Concerned? Yes. But, with all the coverage, I think I've become pragmatic about it. As one sitcom pundit said, "What are 'ya going to do?"

Stansberry and others have sung the song in concert. Diversified holdings... balanced... with proper trailing stop losses... and "don't panic!" So far, I've been able to do all that on the four portfolios I manage (all family members).

I'm interested in your views on the financial sector. Shouldn't inflation inure to their benefit? I've owned some financial stocks in the past but not under these inflationary times. I note that TradeStops has most of them in a yellow or red status. So, there's that.

Good luck with the responses. If you can work in an answer to that last paragraph, then I'd appreciate it.

You're right, John... In general, inflation (more of the garden variety) should benefit banks. And so should a rising-interest-rate environment, in the short term at least.

In fact, there are a few professional money managers of "Rising Interest Rates"-themed exchange-traded funds betting on this trend right now... These funds are heavily weighted toward financials because of the conventional wisdom.

The typical thinking is that rising rates – typically reflected in rising U.S. Treasury yields – are part and parcel of a strong economy. One result is more lending activity and business at banks.

Usually, that's true.

But this time is a little different in a big way...

Before anyone sends me hate mail, what I'm about to say is not "This time is different," which is one of the worst phrases to utter in finance.

In some ways, what I'm about to talk about is actually more of the same (bad decisions by central bankers)... but with one big important difference.

There is a critical detail about today's economic environment that many people are overlooking and that I don't think CNBC is telling you (though I haven't watched in a long time)... And it also is why bank stocks haven't been performing all that well lately.

In short, the Federal Reserve is raising interest rates – making borrowing dollars more expensive. This has happened before and makes Mr. Market jittery in the best of times...

But now the central bank is raising rates – probably by 0.50% at its next meeting next week, a "double hike" that it hasn't done since 2000 – in what is already a slowing growth environment compared with the last two years, as measured by U.S. gross domestic product.

First, let's say this... The Fed is about a year behind in tackling high inflation by raising interest rates. It could have started doing it in the middle of 2021, or even earlier, when the stock market had basically no headwinds while prices of basics like paper started to rise significantly.

But we'll skip rehashing the "transitory" error... All in all, a policy mistake is not very unusual. These mistakes have happened plenty of times before and will happen plenty of times in the future.

But when you throw slowing economic growth into the picture, it complicates a "soft landing" – easing the economy and markets into a higher-rate world – that Fed Chair Jerome Powell still says the central bank is hoping to engineer...

It's going to be hard to do...

Basically, what we're seeing is the Fed making dollars more expensive while growth is slowing and inflation is at historic highs and consumer sentiment is starting to wane, for any number of reasons... the pandemic, the policy response, war, etc...

The Fed doesn't want runaway inflation of the type we saw in the 1970s... No one does. If it doesn't raise rates at all, it could get worse. So it's chosen to attack inflation while sacrificing economic growth.

The Fed hasn't said it in plain English for everyone to hear, but this is precisely what's happening. As we've written, slowing growth and high inflation is also the definition of "stagflation"...

This scenario isn't good for anyone with a financial interest. If growth slows enough, we could see a recession... Long story, short, this scenario is likely what has led bank stocks to sell off in recent months.

Doc wrote in his latest issue of Income Intelligence, published last Thursday...

In general, you want to own banks when interest rates are higher.

Higher rates mean banks can earn more on lending, which for many is the main source of income.

Bank stocks tend to rise when rates move higher or shortly thereafter. Today, though, interest rates are on the rise even as bank stocks are down...

This is because of the important detail we mentioned... The possibility of a recession is already on the table.

Consider the yield curve, which inverted several weeks ago, a very reliable warning signal for a recession in the next 12 to 18 months.

The curve has since "un-inverted" to the way it's supposed to be, but it was upside down long enough to make a point about risk in the market today that is still there.

Short-term rates might be back below long-term rates, but barely... The difference between 10-year Treasury yield and the two-year yield today was a tiny 0.18%.

This relationship is not ideal for banks... Banks would prefer long-term rates be much higher than short-term rates because they borrow money at short-term rates and lend it at longer-term rates.

The wider the spread, the higher the profits.

Despite what we've mentioned today, Doc and his research team last week recommended what they admittedly described as a "mediocre" bank stock to buy right now.

You'll have to read the Income Intelligence issue for all of those details. But in general, over the long term, they see an opportunity within the sector for income investors.

That said, likely for the reasons we've talked about, if you're thinking about jumping into financials in the short term, the technical setup is not good at the moment...

Beware the 'death cross'...

As our colleague Chris Igou wrote in DailyWealth Trader today, it has been a rough few months for financial companies.

We touched on this in a report about JPMorgan Chase's (JPM) concerning earnings report earlier this month. It's a similar story to other banks'.

And we're seeing the weakness show up in stock charts as well. Today, Chris noted the performance of the Financial Select Sector SPDR Fund (XLF), a proxy for the financial sector...

XLF has been trading in a range between $35 and $40, and it's now rounding out a top. This typically happens before a larger move lower for an asset.

What's more, XLF's 50-day moving average (50-DMA) recently crossed below its 200-day moving average (200-DMA). This "death cross" typically happens before a longer-term fall as well. The chart below highlights both of these setups...

This is textbook bearish price action. And we don't want to be on board as this trend turns lower.

If you take nothing else from today's Digest, it should be this... be mindful of "death crosses."

For any asset or index, when a 50-day moving average, the sign of a short-term trend, crosses below the 200-day moving average, a signal of a longer-term trend, watch out.

Until the trend reverses, there's likely some better place to put new money to work.

One final note – we have a 'last call' for another one of Doc's services...

We've written to you lately about the "income surge" strategy Doc uses, which he says allows him to never have to worry about a stock market crash ever again. It sounds pretty appealing today, no?

Well, tonight at midnight our best offer to gain access this strategy will go offline. If you've been interested at all in the recent essays from Doc and his team, click here to listen to his message right now and take advantage of this final call.

He Predicted Inflation and War... And Says Famine Is Next

Bert Dohmen, president of Dohmen Capital Research and founder of DohmenCapital.com, tells our editor-at-large Daniela Cambone that with "real" inflation near 16%, "people will soon run out of spending power."

From a man who correctly predicted inflation and war, this interview is worth a listen. Dohmen says famine is the next crisis to expect... but he also shares how to prepare, and the sector he is "super bullish" on today...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 4/25/22): Johnson & Johnson (JNJ).

In today's mailbag, more thoughts on the railroads... and a different take on inflation... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Something is not right here with [Union Pacific] saying it's too congested and too busy to handle its new business. UP has downsized its operations in Portland, Oregon over the last few years. When they bought SP rail, they consolidated and demolished their one location on one side of town and moved everything to the new SP location in southeast Portland.

"Almost overnight it was then the transportation nightmare from hell. Now it's 100 times worse because of the shipping logistics of the current markets... I don't know if this is typical of other locations in their system or not, but it smells to heaven. As to them not having engines to power the tracks, since they are overwhelmed with new business and revenue why don't they buy more? Is the railroad business model not designed to add future capacity? Insane!" – Paid-up subscriber John M.

"The last 30 years of relative low and stable inflation have spoiled us. If we were to calculate the average inflation over the past 30 years, including the 8% for 2022 and 4% to 5% for 2023 to 2025, it is probably still below historical averages. Everyone is so focused on the past and next quarter. Annual inflation could very well revert back to historical averages." – Paid-up subscriber H.U.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 26, 2022