Another Bull Market Milestone Is Here

Another bull market milestone is here... A bullish sign for Sjug's top 'New China' recommendation... More evidence of a major bottom in precious metals... A special invitation from The Atlas 400... In the mailbag: 'Your indicator is pure bulls***'...

Regular Digest readers know the rally in U.S. stocks has achieved a couple historic milestones of late...

Last month, it (unofficially) became the longest bull market in U.S. history. In recent weeks, it has also pushed not just one, but two companies – Apple (AAPL) and Amazon (AMZN) – to more than $1 trillion in market value for the first time.

But according to research from asset-management firm Crescat Capital, we can now add one more milestone to the list: As of this week, this rally is officially the strongest during any Federal Reserve tightening cycle in history. As Bloomberg reported this morning...

Since the first post-crisis Federal Reserve rate hike in December 2015, the S&P 500 Index has gained 41%. That puts this cycle's rally in the top spot when compared with historical equity advances as the Fed hiked borrowing costs...

The second-strongest rally came before the crash of 1987, with the S&P 500 rising 33% between the first interest rate increase and the first cut. The Fed has raised seven times since 2015 and analysts predict it's set to boost rates again when the central bank's open market committee meets this month.

At 33 months and counting, this is also among the longest tightening cycles in history...

Of the 13 cycles since 1954 – when the Federal Reserve first began publishing this data – only three went on longer.

Given that virtually every one of these cycles has ended in a recession or serious stock-market decline, you might assume this news is a bearish signal. But that isn't necessarily the case...

You see, the three longer cycles – ending in 1966, 1980, and 2007, respectively – were significantly longer. Each went on for more than 40 months, with the longest (ending in 1966) continuing for more than 60 months... or roughly twice as long as the current one.

In short, while there are reasons to be cautious about the broad market today, these milestones aren't among them.

This week also brought a little bullish news for one of Steve Sjuggerud's top China recommendations...

By now, most Digest readers should be familiar with the story of Chinese tech giant Tencent (TCEHY). It's the leader in what Steve has dubbed the "New China" economy, and it's one of the fastest-growing companies in the world today.

Unfortunately, like most Chinese stocks, Tencent shares have suffered a sharp correction in recent months as "trade war" fears have ramped up. However, as Steve has explained, none of these short-term concerns have derailed his long-term bullish thesis.

Yesterday, we learned that Tencent executives apparently agree. They're now buying back the company's own shares for the first time in years. As a separate Bloomberg report noted on Tuesday...

Tencent Holdings bought back shares for a second day on Monday after its first repurchase in four years...

The Shenzhen-based company said it bought 124,000 shares for HK$39.1 million ($5 million) on Sept. 10, more than five times the amount it spent on Friday.

The previous time Tencent bought stock was in April 2014, when it spent HK$77 million buying shares and spurred a three-day rally.

The following chart puts these moves in perspective...

Now, these purchases aren't especially large, but they are noteworthy...

As you can see, Tencent executives have been remarkably disciplined over the past several years. While many companies have been using share buybacks to "juice" earnings growth, Tencent has repurchased shares only two other times in the past six years.

Each of these occurred following a sharp correction when shares were "on sale." And each occurred at or near a long-term bottom in the stock.

In other words, it appears the company believes its own shares are cheap today... And if recent history is any indication, a bottom may be near.

Elsewhere in the market, we're also seeing more evidence of a significant bottom in precious metals...

Last month, we told you that the so-called "dumb money" – as tracked by the weekly Commitments of Traders ("COT") report – had become incredibly bearish on gold. As we wrote in the August 7 Digest...

Both large speculators and money managers – both of which tend to be wrong at extremes – are currently as bearish as they've been in decades.

Money managers are currently holding the largest net-short position on record... surpassing the previous record set in December 2015, just before the four-year precious metals bear market ended.

Meanwhile, large speculators – who rarely hold a net short position in gold – are holding their second-smallest net long position in decades. The only time their net long position was smaller? You guessed it, December 2015...

This signal doesn't mean we'll see gold move higher immediately. But it's an incredibly bullish sign.

Two weeks later, we noted that sentiment among commercial gold traders – the so-called "smart money" – had reached an opposite extreme. From the August 21 Digest...

Commercial traders are now holding their smallest net-short position since late 2001.

Unlike speculators, these folks are generally considered the "smart money." They use the futures markets to "hedge" their business exposure to price fluctuations, rather than to bet on higher or lower prices.

As a result, these traders tend to hold a significant net short position most of the time. When they don't, it means they're unusually confident prices will move higher (or at least are unlikely to fall much further)... And history shows they're usually right.

Well, the latest COT report – published on Friday – revealed we now have a similar situation in silver, as well.

Just like we saw in gold, "dumb money" speculators are now holding their largest net-short position on record. Meanwhile, commercial traders are now more bullish on silver than ever before.

Again, like in gold, these extremes don't guarantee silver prices will move higher immediately. But they are an undeniably bullish sign.

We'll close today with a note from our friend Gray Zurbruegg – president of The Atlas 400 – who has a special invitation for Digest readers...

Ever wondered what it's like landing a Gulfstream jet on an ice-runway in Antarctica... or attending a private wine tasting at Pétrus in Bordeaux... or racing Ferraris through the Italian countryside en route to lunch?

If so, please keep reading...

The Atlas 400 is hosting a cocktail party for interested candidates, following the 2018 Stansberry Conference in Las Vegas on October 2. We're meeting at Harvest, in the Bellagio Hotel and Casino, at 5:30 p.m. And please, only come if you're truly interested in joining our club.

Not familiar with The Atlas 400? Click here to view our new digital magazine. This issue highlights why we travel the world, the caliber of our members, the benefits of membership, and much more.

But please note, The Atlas 400 isn't for everyone. The initiation fee to join is substantial ($30,000), and our excursions aren't cheap.

But if you're in a position to enjoy the fruits of your labor, I urge you to join us for cocktails and a "peek behind the curtain." It's the one chance potential candidates have each year to speak with current members, ask questions, and briefly experience the company of some of the world's most accomplished and interesting people.

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In today's mailbag, Porter responds to criticism of the Stansberry's Investment Advisory team's proprietary Complacency Indicator. Send your notes to feedback@stansberryresearch.com. Good, bad, or ugly, we read them all.

"Useless chart... Wish I was complacent before wasting 45-seconds looking at your Complacency chart. You should have someone with an objective eye look at it before putting it out there." – Paid-up subscriber Rob T.

"While there was a 10% drop in January 2018, the Complacency Indicator went off in August 2017 when the S&P 500 was around 2440. Even with the 10% drop in January, the market only fell to 2558 – and by August 2018 the S&P 500 was over 2850, a one-year gain of 17% even with the 'correction' in between. So, unless you wanted to try to 'time the market', i.e. get out last August and then try to guess the bottom in January, you could have missed a significant gain. It is a fool's errand to try to time the market – this is why I have trouble figuring out how to use these indicators, even if they appear to be historically accurate." – Paid-up subscriber James G.

Porter comment: James – I've studied the available data in a hundred different ways trying to find an indicator that won't give us false positives. I've spent hundreds of thousands of dollars on data and millions more on analysts and computers.

I'm not saying there isn't anyone who knows more... I'm just saying we didn't create this indicator lightly. I believe it's robust and I believe it's very reliable. If we tried to "tune" the indicator into a narrower time frame, we would get false positives.

So for now, this indicator is approaching the limits of what we can know, for certain, by studying the market's internal dynamics. I would recommend overlaying that information with what we know about the external dynamics – our economy. We've added a huge amount of debt during this bull cycle. All of that liquidity makes a "blow off" top (what Sjug calls the "Melt Up") more likely. I don't think we've seen that yet.

So... we have a warning that another correction, and potentially a bear market, will occur within 12 months. And we know that, right now, investors have rarely ever been more complacent – ever, in all of recorded market history.

What should you do with that information? Well, I can't know, of course, because I don't know you or your circumstances. But in general, I'd suggest that our subscribers might use this information in two ways...

First, if you're planning to commit a particularly large and important amount of capital to the market – like a retirement lump-sum payment, for example – you would probably want to wait at least 12 months to see how severe this correction becomes. If you know you may have the opportunity to invest down 20% or 30% from a market top, it's probably worth waiting to see what happens... at least with the majority of that capital.

And while you're correct that our warnings from August wouldn't have gotten you into stocks at a lower price (the January correction didn't send stocks lower than they had been in August), you're forgetting the emotional toll of running directly into a major correction with a huge amount of capital. On the other hand, knowing that a correction is coming is a huge advantage for anyone who is sitting on a lot of cash right now. You have good reason to be patient.

Second, while I don't think trying to time the market is a worthwhile pursuit in regard to 100% of your capital, I definitely believe it's wise to be cautious when other investors are greedy. Likewise, it's smart to get greedy when other investors are afraid.

Objectively and using the data we have, I can tell you that rarely in history – very, very rarely – have investors ever been this complacent. And that's the kind of environment that lends itself to foolish and greedy behavior.

For example, just a few weeks after last August's Complacency Indicator warning, the bitcoin mania boiled over into true "panic buying." The bitcoin market last fall was as foolish and greedy as I've ever seen investors act – ever. Knowing this action was occurring during (and because of) record levels of investor complacency made it easy for me to ignore it. So right as bitcoin made its high (around my birthday on December 18), I ordered the largest batch of gold coins I've ever bought at one time. So far, I haven't made any money on the gold coins. But I still have them all. And I've certainly done better than bitcoin buyers did on the same day.

You might argue that our Complacency Indicator kept me out of a huge investment mania, where, at least in theory, I could have made a lot of money. And I guess that's true. But I've never seen investors avoid being caught up in manias before. Call me stupid, but I agree with Warren Buffett... I want to act more conservatively as I see other investors acting more foolishly.

I suspect that in the next few months, we're going to see investors do even more foolish and greedy things in the stock market. The conditions seem ripe for a massive, manic move... where everyone starts buying stocks, regardless of prices, simply because they keep going up.

If that happens, my hope is that knowledge of this indicator and the inevitability of a big correction or a big bear market will keep you safe and following your stop losses.

"With all due respect, your indicator is pure bulls***." – Paid-up subscriber Antonio S.

Porter comment: Show me a better model...

Regards,

Justin Brill Baltimore, Maryland September 12, 2018