Don't Get Complacent

Checking in on the 'Melt Up' again... Don't get complacent... Investors are more optimistic than they've been in years... The last four times this happened, a significant correction was just around the corner... Don't miss your chance to hear directly from Porter, Steve, and Doc...

We last checked in on Steve Sjuggerud's 'Melt Up' thesis before Thanksgiving...

At the time, the outlook was overwhelmingly positive.

Stocks had been on a tear since early October, and all three major U.S. market indexes had recently broken out to new all-time highs. Meanwhile, Steve's most-trusted long-term indicators continued to show the bull market remained healthy.

In short, all signs said the Melt Up was likely to continue.

However, that bullish message also came with an important reminder...

As I (Justin Brill) wrote in the November 18 Digest (emphasis added)...

For the past several years, Steve has predicted that individual investors would eventually go "all in" on stocks again... and this would push prices to unbelievable new highs in the process.

However, Steve has also made it crystal clear that the Melt Up would not be a one-way move higher... In fact, based on history, he believed the market could experience several gut-wrenching moves down as the Melt Up played out.

I also noted that several short-term sentiment indicators had reached extremes that suggested that one of these sharp corrections could be imminent.

Of course, we know now that wasn't the case...

Stocks continued their relentless rally into year-end.

The benchmark S&P 500 Index tacked on another 5% by New Year's Eve. All told, the S&P 500 finished the year 28.9% higher than it started, good for one of its best annual gains in history.

But this is not the time to get complacent...

Steve's warning is still as valid as ever. And according to many of these short-term indicators, the risk of a gut-wrenching pullback is even higher now than it was back in November.

For example, in that Digest, I mentioned the Chicago Board Options Exchange's ("CBOE") put/call ratio...

This indicator compares how many put options investors are buying with how many call options they're buying. And like other sentiment indicators, it's contrarian in nature...

When folks are piling into put options (bearish bets) relative to call options (bullish bets), the CBOE's put/call ratio jumps higher. This tends to be a bullish short-term sign for the market. It signals the "crowd" is too bearish... and at least a short-term rally is likely.

Likewise, when folks are piling into call options relative to put options, the CBOE's put/call ratio drops lower. This tends to be a bearish sign. It suggests the crowd has gone "all in"... and at least a short-term pullback is likely.

Because this indicator can be extremely volatile, you'll often see it presented alongside a short-term moving average to help "smooth" out its moves.

Back then, the 10-day CBOE put/call ratio had fallen to its lowest level since late January 2018 – just days before the S&P 500 plunged more than 10% in that February's "volatility panic."

As you can see in the chart below, this indicator has now fallen below even that previous extreme...

In other words, according to this indicator, individual investors are now more optimistic about stocks than they were prior to any of the market's short-term peaks over the past several years.

Other sentiment measures are sending a similar message today...

In November, I also mentioned news network CNN's "Fear & Greed Index"...

This index uses the put/call ratio, market volatility, and a handful of other measures to compute a score between 0 and 100. Levels below 50 indicate some degree of fear, while levels above 50 indicate greed.

As of Friday's close, the index had risen to 87, well into "extreme greed" territory. This is up from 50 – or "neutral" – just one month ago. And it's nearly a mirror image of this time last year, when the index sat at just 10... deep in "extreme fear" territory.

Since then, CNN's Fear & Greed Index has become even more extreme, too. It rose to more than 95 in late December – also surpassing its early 2018 highs – and remains deep in "extreme greed" territory at 92 today.

Market sentiment isn't the only reason for prudence today, however...

If you were with us back in January 2018, you may recall I warned you that the market had become "stretched" above an important level. From the January 17, 2018 Digest...

Longtime readers may be familiar with the 200-day moving average ("DMA"). This indicator is considered a rough gauge of the market's long-term trend.

During bull markets, stocks tend to spend most of their time above the 200-DMA. During bear markets, they spend most of their time below it. And perhaps most important, stocks rarely stray too far from this line in either direction before returning to it.

The following chart of the S&P 500 Index shows how it works. As you can see, since stocks moved back above this trendline following the financial crisis in 2009, they have rarely traded below it...

You'll also notice that whenever stocks have rallied significantly above this line, they have eventually come back to "test" it – touching it or even moving below it briefly – before continuing higher.

At that time, the S&P 500 was nearly 12% above its 200-DMA. And it hadn't "tested" it in more than a year. As I explained, this was unusual...

The market has only been this stretched above the 200-DMA three other times since the [bull market] began. And each of those cases preceded a sharp correction over the next few months.

That is exactly what happened...

The S&P 500 plunged more than 10% to test its 200-DMA three separate times over the next four months before the rally finally resumed that spring.

Today, it has happened again...

As you can see in the updated chart below, the S&P 500 is again stretched dangerously high above its 200-DMA...

As always, I'll remind you that these types of indicators are not meant to be precise market-timing tools. This extreme could become even more extreme in the near term. (Back in 2018, the S&P 500 extended to nearly 14% above its 200-DMA before it finally peaked. Today, it's "just" 10% above it.)

But since this bull market began in 2009, every similar instance was followed by a sharp, multi-month pullback in stocks. Given today's corresponding sentiment extremes, we don't expect this time will be different.

Now, before you send me an angry letter, let me be clear...

Just as I explained back in November, the "big picture" remains positive today.

Stocks have continued to make new highs, while Steve's longer-term indicators tell us the market remains healthy. History suggests the Melt Up is likely to continue, and any corrections in the weeks or months ahead are likely to be retraced relatively quickly.

Our general advice remains the same...

If you've already followed our recommendations about proper asset allocation and position sizing – and you're already holding some extra cash, gold, and maybe a few short sales – you can sit tight. There's no need to make any big adjustments to your portfolio right now.

However, if you're holding a large percentage of your portfolio in speculative stocks, you might consider taking some profits and raising a little extra cash today. You'll sleep better... and you'll be able to take advantage of any Melt Up "bargains" that are likely to arise.

One last thing...

If you'd like to hear Steve's latest thoughts on the Melt Up, be sure to join us for a special live event next week...

Next Tuesday, January 14, at 8 p.m. Eastern time, Steve will sit down with Retirement Millionaire editor Dr. David "Doc" Eifrig, Stansberry Research founder Porter Stansberry, and a very special guest for their annual roundtable discussion.

During this free event, you'll hear each of their 2020 market outlooks for the first time. You'll learn what's likely next for the Melt Up, gold, and even cryptocurrencies. And you'll get the name and ticker symbols of each of our gurus' favorite stocks for the coming year just for showing up.

This roundtable has historically been our most popular live event of the year... And it's the only time in 2020 that you're likely to see Porter, Steve, and Doc sit down together to share their thoughts on the market.

Again, it's absolutely free for all Stansberry Research readers to attend. Just click here to reserve your spot right now.

New 52-week highs (as of 1/9/20): Alibaba (BABA), Becton Dickinson (BDX), Booking Holdings (BKNG), Bristol-Myers Squibb (BMY), Berkshire Hathaway (BRK-B), Blackstone (BX), New Oriental Education & Technology (EDU), Western Asset Emerging Markets Debt Fund (EMD), Facebook (FB), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Alphabet (GOOGL), Huntington Ingalls (HII), JD.com (JD), Kinder Morgan (KMI), KraneShares CSI China Internet Fund (KWEB), Lockheed Martin (LMT), Medtronic (MDT), Macquarie Infrastructure (MIC), Microsoft (MSFT), Norilsk Nickel (NILSY), NetEase (NTES), Nuveen Municipal Value Fund (NUV), Nvidia (NVDA), Invesco High Yield Equity Dividend Achievers Fund (PEY), ResMed (RMD), Rockwell Automation (ROK), ProShares Ultra Technology Fund (ROM), ProShares Ultra S&P 500 Fund (SSO), TAL Education (TAL), The Trade Desk (TTD), and Vanguard S&P 500 Fund (VOO).

A quiet day in the mailbag. Tell us what's on your mind at feedback@stansberryresearch.com. Remember, we can't provide individual investment advice... but we do read every e-mail we receive.

Regards,

Justin Brill
Baltimore, Maryland
January 10, 2020