Beware This Market Buzzkill

A dirty word in the latest stimulus talks... Something a lot of people can agree on... Beware this market buzzkill... Greg Diamond says the 'top' is already here... How to build the best portfolio you can today...

Once again, the big questions are... 'How much?' and 'How soon?'

We're talking about stimulus negotiations in Washington, D.C. again... And as we said with the first two rounds of talks over the past 10 months, something will happen. It's just a matter of the details...

We wrote in the January 19 Digest, just ahead of Inauguration Day, that "passing this third stimulus measure in the past 12 months might be messier than many expect."

And that looks like exactly what's happening...

The starting headline number for a massive stimulus package from President Joe Biden's administration was $1.9 trillion... A Republican-led counteroffer has checked in at around $620 billion, about a third of the total of the Democrats' proposal.

Some politicians, like Florida Sen. Marco Rubio, have suggested breaking up a stimulus bill into parts that can be agreed upon piecemeal... Meanwhile, Democrats could use a legislative loophole called "reconciliation" to move through what they want without any Republican support.

For now at least, it looks like both sides are working toward another single, big, bipartisan package. Our Stansberry NewsWire team reported earlier today on the negotiations between Biden and Republican senators this week...

An income-eligibility cap – so stimulus checks aren't sent to people who don't really need them – and the size of the checks ($1,000 or $1,400) were discussed. More from our NewsWire team...

Senator Shelley Capito (R-WV) said Biden demonstrated a willingness to negotiate during the meeting, saying, "No promises made, and no real concession made at the time, but certainly a greater understanding of where we are."

But a bipartisan deal might not happen at all, or as smoothly as many people might expect. And when we ignore the posturing from everyone in D.C. and look at what they're really talking about, we can see why...

Who pays?

For better and worse, that is a relevant question today...

This time around, unlike the times leading into the previous two stimulus bills, the answer is not so cut-and-dry as "Federal Reserve Chair Jerome Powell's digital-money printer working on behalf of the U.S. Treasury."

You might be hearing more about this soon, as the negotiations likely drag on... It could be a buzzkill for today's euphoric market in the short term, perhaps a trigger for a correction that many of our editors feel is overdue.

You see, all of a sudden, as if the fiscally conservative bones have been activated again, it seems at least enough folks in Washington are concerned about the federal government's massive, $3 trillion budget deficit in fiscal year 2020.

And now, they're talking about that dirty word... taxes... as a solution. It was only a matter of time...

We don't cite the New York Times here often – if ever. But yesterday, reporter Jim Tankersley – who has covered middle-class wage "stagnation," and economic and tax policy for the newspaper for more than a decade – gave a good look into the ongoing taxes angle of the stimulus discussions and what I (Corey McLaughlin) am talking about...

More than 100 Democratic lawmakers are urging Speaker Nancy Pelosi of California and Senator Chuck Schumer of New York, the majority leader, to repeal a business tax break as part of the economic aid package that Democrats hope to send to President Biden in the coming weeks.

The tax cuts in question – which center on so-called net operating losses – were included in a rescue bill Congress passed in March 2020, as the pandemic spread and the nation was in the midst of a recession. They were temporary rollbacks of a limitation placed on business deductions by the 2017 tax law that Republicans passed and former President Donald J. Trump signed.

In effect, the March provision allowed some companies that suffered large losses in recent years to reduce their tax bills to the federal government, by applying those losses to offset taxes on profits from the previous five years.

In other words, this tax provision – which was embedded in March's CARES Act – was good for a lot of corporations and Wall Street stakeholders. But now, a reversal of this move is on the table...

The leaders of the proposed legislation – and a related change that would effectively raise taxes on some businesses in the years to come – say it could reduce federal borrowing for the aid package by as much as $250 billion over a decade.

Here's the big point...

If we've seen one thing play out in the past decade or so, it's that any time there is even the slightest talk of "paying down all the debt" back in practical terms – like raising taxes, or the Fed sending smoke signals about raising rates and slowing down asset purchases – it spooks a lot of investors...

Most people and corporations can agree that 'higher taxes' are a buzzkill...

Nobody really wants to pay taxes. It cuts into the bottom line of folks on Main Street and Wall Street... And who knows where the money is actually spent, or if it's worth it at all.

Yet the direct and indirect bills due from government spending and money-printing are only growing... And there's only so much that a new influx of revenue from things like sports gambling or legal marijuana can do for bankrupt governments in a no-yield world.

Even if this specific tax proposal, suggested recently by 100 Democrats, is not part of the stimulus package that is ultimately passed, you should expect the word "taxes" to be used much more for any number of potential spending bills than we've heard in past years...

And the stock market, particularly Wall Street investors, won't like that. As NewsWire editor C. Scott Garliss said last month about the possibility of a nearly $2 trillion stimulus package...

The major concern for Wall Street money managers is the tax implications of such a hefty bill. The incoming administration has already talked about hiking taxes for corporations and the wealthy.

A number of economists and policy think tanks have suggested that would be a horrible idea considering the fragility of the current economy. The consensus among those strategists is Biden should wait until his second year of presidency at the earliest before raising taxes. That would allow the growth picture more time to stabilize.

But, in the meantime, there are questions to answer. Don't get me wrong, it's not the end of the world. But it's reason for pause and reflection.

Today, Ten Stock Trader editor Greg Diamond did just that...

As we like to say, if you're interested in gauging short-term volatility, there's no better place to look than the "technicals" – or technical analysis. We like to think of technicals as the study of repeated trading patterns in the market.

As Greg, a chartered market technician, says... it's also really the study of human behavior expressed in the stock market through indicators like 50- or 200-day moving averages or the "advance/decline" line.

I won't get into the weeds today – we did so most recently in the December 10, 2020 Digest. But we like to pay attention to technical analysis because so often it shows what's going on "under the hood" of the markets, when other ideas can't explain what's happening...

It may sound abstract, but technical indicators show what could happen... and what looks likely. And you can often see these themes playing out before a headline – like higher taxes concerns in a stimulus package, for example – is declared the reason for triggering something like a market correction.

It's like turning the idea that "stocks dropped because of XYZ news" upside down. It's more like "stocks are ripe to drop and people might say XYZ news caused it." If this sounds interesting or appealing to you, be sure to check out more of Greg's work.

With this in mind, no matter what happens with the stimulus negotiations...

Greg is already warning that a near-term 'top' has arrived in U.S. stocks...

The fact that stocks today are still rising despite slow negotiations (tax talk included) – and that Big Tech stocks like Amazon (AMZN) and Apple (AAPL) are trading sideways after record earnings reports – is a signal for downside ahead. (That's true even when considering that Amazon CEO Jeff Bezos announced yesterday that he'll step aside as the company's leader.)

As Greg wrote today...

I find it interesting that the markets rallied on more news of stimulus measures from Congress when this has clearly been priced in for weeks and if anything has the setup to disappoint...

The sentiment has clearly switched to all is well, the Reddit trade is over, hedge funds can buy back everything they unwound, and away higher we go... Sentiment is very bullish. This is the very environment that sets up for the unexpected.

Not many market observers are saying this today... but based on the price action over the past few weeks, Greg says U.S. markets are in for a lot more volatility.

He's looking specifically at one of his technical indicators – the "spread" between the tech-heavy Nasdaq Composite Index and the Dow Jones Transportation Average, which is a gauge of U.S. airline, trucking, and railroad stocks.

A "divergence" in these two indexes in the past – including in March 2020, when one was going up and the other down – has been an early signal that trouble is afoot for U.S. stocks.

Greg sounded the alarm on Monday...

As he wrote to Ten Stock Trader subscribers in his weekly market outlook...

I want to highlight something that you often see during the final stages of a top. The Dow Jones Transportation Average ("Transports") has a long history of topping out BEFORE other markets do, making a lower high, and then really accelerating to the downside.

This is always a big warning sign that markets are about to tank. We saw this occur last year, as a matter of fact...

The green arrows mark the same points in time and two new highs in both indexes. OK, no problem there. But then look what happened... The red arrows mark a much lower high in the Transports while the Nasdaq made a higher high – major price divergence. That was the warning signal... And you can see what happened after that.

Today, Greg said we have the exact same setup. The Nasdaq has risen roughly 8% over the past month, while the Transports index is just about even over the same period...

I noted last week that I'm expecting a major top in the market, and based on the Dow Jones Transportation Index price action I believe the top is already in place. It's just a matter of when these other indexes (like the Nasdaq 100) play catch up...

Greg caught our eye with this technical indicator alone.

But when the "narrative" (lingering stimulus negotiations, the market getting over its short-squeeze frenzy, and not being impressed with Amazon's first $100 billion quarter) and the "numbers" (like the above divergence in two key U.S. indexes) combine to tell the same story...

It's wise to pay even closer attention to what's going on.

All this said, please note that we're talking about a near-term top...

Greg's Ten Stock Trader service and analysis – as well as Ben Morris and Drew McConnell's work in DailyWealth Trader that we cited yesterday – is much more short term in nature than, say, our flagship Stansberry's Investment Advisory or many of our other publications.

Let's be clear...

The backdrop for Dr. Steve Sjuggerud's "Melt Up" thesis remains in place today. And you know what that means... low interest rates... government stimulus and the like... and double-digit corrections along the way before a truly euphoric blowoff top.

Vic Lederman, an analyst on Steve's team, put it well for folks who are in this for the long run in the January 29 issue of the free DailyWealth e-letter. He showed what happened during the dot-com-bubble-era Melt Up. As Vic said...

We're here to invest... not flail at trading market volatility. The simple truth is that Melt Ups come with volatility. Corrections are normal. The chart below shows it...

The Nasdaq fell roughly 10% five times on the way to its final dot-com era peak. Yet when most folks talk about that boom, they describe it as a steady run higher. They only remember the volatility on the way down... not the volatility on the way up.

Imagine if you'd gotten out of the market right after the first correction. Or the second. You would have missed out on life-changing returns. Worse still, maybe you rode the tech bubble all the way back down... waiting for things to turn around.

Short-term thinking and a lack of strategy can produce results like that. Don't fall victim to losing sight of the big picture.

We saw a 9.6% correction in the benchmark S&P 500 Index in September 2020.

So here's the thing... If you're a longer-term investor, we say beware a "market buzzkill" today only so you can feel prepared for if – and when – a pullback happens... to let your emotions hear some logic beforehand.

It's a way to remind you that a truly diversified portfolio is the antidote to uncertainty... and to honor your stop losses, of course. But also, you must realize that this thing might still have room to run higher...

We admit, though, these are big questions for anyone to tackle...

That's especially true if you're busy with, you know, life.

So one more thing before we go today... If you feel uncertain about how best to manage your portfolio, as we've said the last few weeks, it helps to have help.

Over the past few years, we've set out to help address this very concern and the top question we hear from subscribers...

How do I use the best of your research in a well-allocated portfolio? You guys send so much stuff, I don't know what to do.

Well, our Director of Research Austin Root sat down recently with Steve and Retirement Millionaire editor Dr. David "Doc" Eifrig to talk through precisely this idea and give insight on how to put together a great portfolio. And as a bonus... Austin, Steve, and Doc each shared a free stock pick for 2021.

You may have already caught this "2021 preview" event when it went live last month... but the feedback on it has been so good that we've kept a replay open for the past week. However, it will only be available for a few more days.

Click here right now to watch if you haven't already. It's a perfect time to hear the message. Austin is getting ready to update our Stansberry Portfolio Solutions portfolios on Friday... And you'll learn how you can access them as soon as they're published.

The Beginning of the End?

The Big Short Squeeze represented a paradigm shift that has rattled Wall Street to its very core, as industry insider Vince Lanci tells our colleague Daniela Cambone in this exclusive video. He also warns that it could signal the start of a market meltdown...

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 2/2/21): ARK Fintech Innovation Fund (ARKF), Electronic Arts (EA), Futu Holdings (FUTU), Alphabet (GOOGL), Green Thumb Industries (GTBIF), ICICI Bank (IBN), Innovative Industrial Properties (IIPR), Jushi (JUSHF), ETFMG Alternative Harvest Fund (MJ), Nuveen Municipal Value Fund (NUV), OptimizeRx (OPRX), Palo Alto Networks (PANW), Qualcomm (QCOM), Sea Limited (SE), Silvergate Capital (SI), First Trust Cloud Computing Fund (SKYY), TFI International (TFII), and Zendesk (ZEN).

In today's mailbag, an update on our annual Report Card. Do you have a comment or question? Send us an e-mail at feedback@stansberryresearch.com.

"Hey, folks... will Porter (or someone else) be doing a 'Report Card' this year examining the performance of your many services? I always look forward to it, but haven't heard it mentioned this year! Thanks in advance for your reply." – Paid-up subscriber Peter C.

Corey McLaughlin comment: The short answer is "yes." We know our annual Report Card is one of the most anticipated things we do each year. And good news...

Our publisher Brett Aitken is putting the finishing touches on this year's grades and write-ups as we speak. Look for the first part of the 2020 Report Card in this Friday's Digest.

All the best,

Corey McLaughlin
Naples, Florida
February 3, 2021