Another big problem to keep an eye on...

Another big problem to keep an eye on... This 'lion' is still hunting... 'Brace for another steep decline'...

 Troubles in the "junk" bond market aren't the only concern for U.S. investors...

We've been covering the turmoil in high-yield bonds... and how credit "contagion" in these bonds could spread to seemingly unrelated markets.

 But regular readers know it's just one of three big trends we're watching.

Porter used the metaphor of lions hunting zebras to explain these trends in the September 11 Digest...

Think of investors like zebras. They all tend to run together in the same way at the same time. They stay with the herd. Like zebras, investors never change their stripes. How many times have you made the exact same investment mistakes? If you're honest, the answer is probably again and again and again.

But the way investors are most like zebras is the way investors seem to believe the lions aren't interested in eating them. After lions come out and grab a few zebras, the other zebras will stand off just a few yards away. They'll sit there and watch the lions eat their friends... or their family. There's nothing they can do about it...

 Porter explained that there are three big "lions" behind the recent decline in stocks: the plunging prices of speculative debt (junk bonds), the ongoing bust in the oil industry, and the bear market in emerging-market stocks...

The first sector to feel it in America was transportation. Your first warning of an impending bear market was when the Dow Jones Transportation Average (in purple) didn't "confirm" the new highs set by the Dow Jones Industrial Average earlier this year. Transportation stocks fell because falling oil prices led to a big reduction in demand for oil trains.

Likewise, emerging markets have a large influence on major U.S. companies because so much of the end-user demand for things like computer chips, soft drinks, and even Disney movies comes from the major emerging markets – Brazil, Russia, India, and China.

At the very least, before I become bullish on U.S. stocks, I want to see these "lions" stabilize. As long as these critical pieces of the global economy remain in significant downtrends, there's no way U.S. stocks can sustain a rebound.

The third "lion" – emerging markets – is making news today...

 In a surprising article yesterday, the Wall Street Journal reported that emerging-market central banks – led by China in particular – are dumping U.S. Treasury bonds at an alarming rate. From the article...

Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.

Sales by China, Russia, Brazil, and Taiwan are the latest signs of the emerging-markets slowdown that is threatening to spill over into the U.S. economy. Previously, all four were large purchasers of U.S. debt.

Foreign official net sales of U.S. Treasury debt maturing in at least a year hit $123 billion in the 12 months ended in July, said Torsten Slok, chief international economist at Deutsche Bank Securities, citing Treasury Department data. It was the biggest decline since data started to be collected in 1978. A year earlier, foreign central banks purchased $27 billion of U.S. notes and bonds.

 The reasons behind these moves are complicated, but there are a few general points to understand...

Over the past decade, a combination of rising commodities prices and a weakening U.S. dollar has created a boom in emerging markets. This has allowed emerging economies to build large trade surpluses, which they have used to buy and hold U.S. Treasury bonds as "reserves."

Over the past few years, commodities have gotten crushed and the U.S. dollar has grown stronger... and the trend in Treasurys is now reversing.

Emerging markets that were once "booming" are now "busting," and money is fleeing these countries. They're now selling U.S. Treasurys to prop up their own economies.

 The reversal started earlier this summer, when the selloff in emerging-market stocks began... But it accelerated in August, after China's central bank – the People's Bank of China ("PBOC") – unexpectedly devalued its currency, the yuan.

As we discussed at the time, investors were already worried... China's stock market, the Shanghai Stock Exchange, had plunged nearly 30% from early June to the end of July, money was fleeing the country, and there were rumors that the Chinese economy was slowing.

The surprise devaluation was likely meant to help boost its economy... but it had the opposite effect. It was seen as a sign that the rumors were true – that China was slowing, and the government was getting desperate.

The move set off another decline in Chinese stocks, and caused more money to flee China's economy. So the Chinese government joined other emerging markets and began selling Treasurys and buying the yuan to keep its currency from falling further.

 According to the Journal, the latest data for September show that China and other emerging markets are still selling.

This suggests that despite the recent rally in emerging market stocks, these problems aren't going away. Further declines could be coming.

In other words, it looks like this "lion" is still hunting.

 It's important to note that despite the record selling in Treasurys, interest rates haven't risen like you might expect. In fact, the benchmark 10-year Treasury rate has actually fallen since the selloff began.

The Journal notes that the "flight to safety" trade – investors moving from assets like stocks and corporate bonds into "safer" U.S. Treasury bonds – and buying from a handful of other central banks have offset the sales so far.

We can't be certain how this "tug of war" between buyers and sellers will end. But if China and other central banks continue to sell U.S. Treasury bonds, it may only be a matter of time before other investors join them.

 Switching gears, our colleague Jeff Clark – editor of the Stansberry Short Report – thinks the recent rally in U.S. stocks could also nearing an end…

As we've mentioned recently, Jeff believes the market is tracing out a similar pattern to the one we saw during the most recent correction in 2011.

If the pattern continues, a decline to new lows could be starting soon. As he explained in an update to subscribers on Tuesday...

Take a look at this chart of the S&P 500 from 2011...

The market fell hard in August 2011. It then consolidated in a wide trading range for about two months before reaching its final bottom in October.

During the consolidation period, there were three strong bounces. The third bounce nearly tagged the 50-day moving average (DMA). That line held as resistance, and the S&P 500 dropped down hard, taking out its previous lows and setting the stage for a year-end rally.

Here's how the S&P 500 looks today...

As Jeff explained, the market is bumping up against the same line – the 50-day moving average – that stopped the rally in 2011. In addition, the market has become extremely "overbought" as well. More from Jeff...

This is a chart of the NYSE McClellan Oscillator, which measures overbought and oversold conditions on the New York Stock Exchange.

The NYSE McClellan Oscillator closed at 58 on Monday. That's the most overbought level of the year so far.

Previous trips up near this level in mid-July and mid-September preceded quick declines of 3.1% and 5.3% respectively in the S&P 500 over the next two weeks.

As longtime readers know, Jeff is a trader. As editor of the Stansberry Short Report, he focuses mostly on short-to-intermediate-term trading – trades lasting several days to several weeks. So many of his recommendations won't be applicable to folks interested in longer-term investing.

But we think his advice today is useful for all our readers...

Now IS NOT the time to be aggressively adding to long positions...

Now IS the time to be trimming back long positions.

If you've been looking for a good opportunity to "lighten up," this could be it.

 New 52-week highs (as of 10/7/15): Constellation Brands (STZ).

 One subscriber asks about gold in today's mailbag. Send your questions and comments to feedback@stansberryresearch.com.

 "People say Gold is a good investment and everyone should have some. Should I buy physical Gold or a gold IRA? What about silver?" – Paid-up subscriber Nancy L.

Brill comment: We do recommend putting a small percentage of your savings in physical, "hold in your hand" gold and silver bullion. How much you buy depends on your circumstances, but somewhere around 10% is a good place to start for most people.

But gold is not an investment like a stock or a bond. As our friend Doug Casey explained in this classic interview on gold, an investment is "an allocation of capital to produce more capital." Instead, think of gold (and silver) as just another form of savings. Just like it's always a good idea to keep some savings in U.S. dollars or your local currency, it's always a good idea to keep some savings in gold.

Regards,

Justin Brill
Baltimore, Maryland
October 8, 2015