Fri, Sep 12, 2014|Sean Goldsmith

Another one of our analysts gets bearish...

Another one of our analysts gets bearish... Should you still be dancing?... End of the bull market is 'probably a few months away'... Short the dollar... Go long gold and silver... How to prepare yourself for the coming correction...

Porter isn't the only Stansberry & Associates editor concerned with the potential for a market correction...

We've had this discussion in the Digest many times... But today, we're covering the upcoming market correction from a different perspective. First, a quick review...

The stock market is at all-time highs. We haven't had a correction of 10%-plus in close to three years. We haven't seen a 20%-plus correction in more than five years. The market's consistent march higher has lulled investors into complacency. The Volatility Index ("VIX") – the market's fear gauge – is sitting below 14. That's up from July but well off the post-crisis highs of 80.

And the market remains calm, despite the crushing amount of debt in the world, growing wealth disparity, and massive geopolitical issues.

There's no doubt the world is in "risk on" mode... to an absurd level, even. As we noted yesterday, Citibank is encouraging investors to add leverage to buy high-yield bonds, some of the riskiest corporate credits available.

This shouldn't surprise you. People do inane things as markets heat up (and most S&A analysts agree that we're nearing the final inning or two of this rally). And today, investors who require a minimum return (like pension funds or retirees) are forced to play the game.

Taking inflation into consideration, investors can expect returns of around zero (or negative) in Treasurys, money markets, and other ultra-safe investments. That has caused money to flow into riskier assets (like stocks and high-yield bonds). As these risky assets have increased in value with little volatility, market participants have become "fat and happy."

But the smartest investors – those who have been around for a market cycle or two – know this is the time to worry.

As billionaire investor Howard Marks, founder of Oaktree Capital, wrote in his latest memo...

While investor behavior hasn't sunk to the depths seen just before the crisis (and, in my opinion, that contributed greatly to it), in many ways it has entered the zone of imprudence. To borrow a metaphor from Chuck Prince, Citigroup's CEO from 2003 to 2007, anyone who's totally unwilling to dance to today's fast-paced music can find it challenging to put money to work.

It's the job of investors to strike a proper balance between offense and defense, and between worrying about losing money and worrying about missing opportunity. Today I feel it's important to pay more attention to loss prevention than to the pursuit of gain.

It's worth noting that on July 1, 2007, former Citigroup CEO Chuck Prince told the Financial Times that the market rally would end at some point... But he believed that due to the huge amount of liquidity in the world, the bubbling issues in the U.S. subprime market wouldn't disrupt things.

In his now-infamous statement, Prince told the Financial Times...

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.

The S&P 500 peaked three months later.

Following Marks' line of thinking, you need to understand what's happening today... And you need to understand why we might see a sudden market correction.

We aren't saying the market will plunge next week... But if you're not prepared for the possibility, it could be bad news for your portfolio.

Typically, we cover the macro reasons we'll see a correction (like absurd valuations, government debt, falling consumer demand, etc.). Today, we'll look at it from a different angle... We're sharing S&A Short Report editor Jeff Clark's technical analysis on the market.

Jeff is worried today... And he sees lots of potential trades setting up. As he wrote in yesterday's Growth Stock Wire, titled, "Be Prepared... This Will End Badly"...

Let me first say that I am bearish on the U.S. stock market. I think it's expensive. It's under the influence of the Fed's artificially low interest rates. It's manipulated. And, when the game finally ends, it's going to end badly.

But here's the thing...

Corrections and big declines in stock prices usually don't happen when everybody is looking for them.

Think about the small 3% pullback we got in April, and the 5% drop that happened in August. It seemed that as soon as stock prices started to fall, many analysts turned bearish. The media's talking heads put aside their bubbly personalities to report the gloomy financial news. And investors rushed to sell stocks short.

And while there are lots of indicators showing a potential pullback in stocks, Jeff isn't biting just yet...

For the most part, these warning signs indicate vulnerability. They tell investors to be cautious, protect profits, and to trim their portfolios a bit just in case stocks take a quick tumble. They don't signal a major trend change from a bull market to a bear market. But the end of this bull market is close... probably a few months away.

In the meantime, Jeff is watching several areas of the market for potential trades. One possible setup he found is shorting the U.S. dollar. As he told S&A Short Report subscribers on Tuesday...

The greenback has enjoyed a blistering run higher over the past couple months. The chart has gone parabolic (straight up), and these sorts of moves almost always end badly. Most of the technical indicators on the dollar are more overbought now than they have been at any time in the past decade. So the dollar is ripe for a reversal.

Along with a falling U.S. dollar, Jeff sees big upside potential in gold and silver. Gold stocks had a major reversal yesterday... The Market Vectors Gold Miners Fund (GDX) dropped as much as 1.4%, then reversed, ending the day up 0.7% – a bullish sign for gold stocks. As he wrote in today's S&A Short Report...

This is how intermediate-term rallies begin for the sector. After a painful decline, gold stocks gap lower one day – usually breaking an important support line in the process. Then they turn around and close higher on the day. This sort of action marks a selling exhaustion and often precedes a big and fast move higher.

This was how gold stocks bottomed last December. The exhaustive selling followed by a big-reversal day set the stage for the first gold-stock rally of 2014. We took advantage of that rally by making several profitable trades, including a 30% gain in one month on New Gold calls, a 110% gain in two months on Silver Standard Resources calls, a 71% gain on Eldorado Gold calls, and a 120% gain in just three trading days on Yamana Gold calls.

The blue circles on the chart mark the reversal days that led to big rallies in gold stocks this year. And we saw the same thing yesterday, which is why Jeff suspects "we're on the cusp of another big rally in gold stocks."

He's also calling for a big rally in silver. As he told subscribers last week...

My favorite trading indicator for silver just flashed another "buy" signal.

Back in April, I showed you that moving average convergence divergence (MACD) crossover signals, combined with pinching Bollinger Bands, are extremely accurate at picking good times to buy and sell silver.

Take a look at this chart...

Out of fairness to Jeff's subscribers, we won't discuss the details of the silver chart above (thereby giving away his accurate indicator)... But in August 2013 – the last time we had the setup we have today – silver rallied more than 20% in two weeks.

To sum up today's Digest: It's time to start thinking about risk... and how to prepare yourself for a market correction.

Investors who buy blindly into these bull markets will get crushed on the way down. We want you to know the potential risks that lie ahead... and how to profit from them.

That's why next Thursday, Jeff is hosting a free webinar to discuss why he thinks we're close to a correction... and how to position yourself to profit when things turn down. He'll show you which indicators he watches to signal a bear market and discuss what those indicators are saying today.

If you haven't started positioning your portfolio for a correction, it's OK... You still have time. But I highly encourage you to watch what Jeff has to say... Discover which indicators you should be watching that will signal a market downturn... And learn how to potentially profit when the correction arrives.

You can learn more about this free webinar by clicking here.

New 52-week highs (as of 9/11/14): 1st United Bancorp (FUBC), Eli Lilly (LLY), Microsoft (MSFT), PowerShares S&P 500 BuyWrite Fund (PBP), ProShares Ultra Technology Fund (ROM) and Union Pacific (UNP).

In today's mailbag, one subscriber weighs in on the "disappearing middle class" in Manhattan, and another continues the discussion on McDonald's. Are you shopping at discount retailers to make your dollar go a little further? Are you feeling the effects of inflation personally? Let us know what's on your mind at feedback@stansberryresearch.com.

"I live in Manhattan, where real estate values are elevated and the standard of living is high. Restaurants and stores are busy. However, when I travel outside the city by auto on the way to a quiet retreat in a rural area, I see cars and houses for sale in middle class neighborhoods and many closed businesses. Make no mistake about this. The economy is in trouble, and the middle class is taking the brunt of it. The financial markets will continue on their upward path as long as it lasts, but they will ultimately revert to the mean and more accurately reflect what's going on in the real economy, an economy that's crushing the middle class." – Paid-up subscriber Richard Bliss

"What many do not realize is that McDonalds is mostly franchises here in the USA. The franchisee will suffer far less return on investment and his own work hours when the minimum wage is raised to $15, and his product/service quality will suffer until the competition is "wiped out" and the franchisee can raise his prices to again make a decent return for his investment and hours. By that time it might be too late for many franchisees and they will have exited the market and run off to Uruguay or wherever.

"So, I see a big drop in quality of product and service at all fast food enterprises including McDonalds in the near term, and perhaps the long term, if the $15 minimum wage is passed, not just the rise in prices for fast food. Corporate McDonalds will not suffer as much, but will seriously consider moving their HQ overseas like BurgerKing since much of their business is now exoUSA." – Paid-up subscriber Joe Granger

Regards,

Sean Goldsmith

Baltimore, Maryland

September 12, 2014

How much upside is left in U.S. and European stocks today...

Yesterday, research analyst Brett Eversole explained how the True Wealth Systems computers spot bullish set-ups in the stock market.

In today's Digest Premium, he explains how much upside we could see in U.S. and European stocks before interest rates likely spike higher next year...

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

How much upside is left in U.S. and European stocks today...

Editor's note: Yesterday, research analyst Brett Eversole explained how the True Wealth Systems computers spot bullish set-ups in the stock market. In today's Digest Premium, he explains how much upside we could see in U.S. and European stocks before interest rates likely spike higher next year...

Over in Europe, we're seeing what Steve Sjuggerud has dubbed the "Draghi Asset Bubble" based on European Central Bank head Mario Draghi, who has committed to doing the exact same thing former Federal Reserve Chairman Ben Bernanke did.

But Europe has been a funny case lately. We have been (and still are) bullish on the Draghi Asset Bubble, but it hasn't been working out over the last few months. Two months ago, our systems unanimously told us to sell, so we closed our positions in Europe.

We've seen a small rise in prices over the past few weeks, but not enough to kick our systems back into "buy" mode. At this point, we're sitting on the sidelines in Europe and waiting for that uptrend confirmation, because we really need that. No matter how many other things you have on your side, if you don't have the uptrend, it can be dangerous.

So we're on the sidelines of the Draghi Asset Bubble for now, although we expect to get back into it soon.

Meanwhile, in the U.S. market, we still see a lot of opportunity. Emerging markets are the next stage that we see in the rally, where the next big set of gains will be. But that doesn't mean that gains in the U.S. are over at all. A lot of the big-picture ideas are still in place.

It really comes down to the idea of 0% interest rates thanks to the Bernanke Asset Bubble. We've written a lot in True Wealth and in True Wealth Systems about the idea that the Federal Reserve will probably raise interest rates sometime next year. Even then, they aren't going to be at any kind of normalized rate for a couple years.

Historically, low interest rates lead to higher stock prices. It's a logical relationship. When folks can get 8%-10% in the bank with no risk, they're not really willing to bid up stock prices. But when they can only get 0.5% in the bank, people need that income. They become willing to bid up stock prices.

We think the market in general can easily move higher from here. The S&P 500 could move to a price-to-earnings (P/E) ratio in the low 20s without it being out of whack historically. With rates this low, a more normalized P/E ratio is around 22. We're around 18 or 19 today. So there's definitely upside in U.S. stocks, and at the same time, earnings are expected to grow over the next couple years by double digits. Our preferred way to profit off U.S. stocks in True Wealth Systems could see 30%-50% upside over the next 18-24 months.

– Brett Eversole

How much upside is left in U.S. and European stocks today...

Yesterday, research analyst Brett Eversole explained how the True Wealth Systems computers spot bullish set-ups in the stock market.

In today's Digest Premium, he explains how much upside we could see in U.S. and European stocks before interest rates likely spike higher next year...

To continue reading, scroll down or click here.