Don't Get Too Bearish Yet
The sell-off continues... An important 'test' for the market... Don't get too bearish yet... A big day for precious metals... The last time this happened, gold stocks soared... In the mailbag: Sjug responds to 'Melt Up' fears...
The broad-market sell-off continued today...
All three major U.S. indexes closed sharply lower again.
The benchmark S&P 500 Index fell 2.1%... the Dow fell 2.1%... and the tech-heavy Nasdaq fell "just" 1.3%.
More important, as you can see in the following chart, today's decline pushed the S&P 500 below its 200-day moving average ("DMA") for the first time since April...
As longtime readers may recall, the 200-DMA is considered a rough gauge of the market's long-term trend. During bull markets, stocks tend to spend most of their time trading above the 200-DMA. During bear markets, they spend most of their time trading below it.
The S&P tested this level three different times following February's "volatility panic," but it never broke solidly below it. In fact, outside of a few days early this year and two days during the "Brexit" panic in June 2016, the S&P 500 has not broken below this level in a meaningful way since the broad market correction in early 2016.
Seeing this support level fail again today is concerning...
But it could simply be another "false" breakdown like those we've seen several times over the past couple years.
Why do we say that? Take another look at the chart above...
At the bottom, you'll see the S&P's relative strength index ("RSI"). This is a simple momentum indicator with values ranging from 0 to 100. Values below 30 indicate an asset is "oversold" and may be due for rally. Values above 70 indicate an asset is "overbought" and may be due for a correction, or at least a pause.
As you can see in the earlier chart, stocks are now extremely oversold. In fact, they're now stretched to the downside to nearly the same degree that they were stretched to the upside back in late January.
This is a bullish sign.
Of course, this doesn't necessarily mean stocks will head higher tomorrow. It's common to see a "divergence" form – where stocks go on to make a new extreme that isn't confirmed by a new extreme in the RSI – before a significant reversal begins. But this reliable indicator says at least a short-term bottom is near.
As always, no single indicator is foolproof. So make sure you continue to follow your trailing stops, just in case. But history is clear: Anyone who panics and sells stocks now is likely going to regret it.
Of course, this isn't the only reason we remain cautiously bullish today...
As regular Digest readers have no doubt become sick of hearing, all of the reliable long-term indicators of stock market, credit market, and economic health we follow remain positive today.
While a broad market correction of 10% or more is always a possibility, these measures tell us the chances of a true bear market or a recession are still extremely low.
So-called "seasonality" could now provide a tailwind as well. As Morgan Stanley analysts explained in a research note today, we're now entering an historically bullish time for stocks...
Seasonality is about to get 'helpful': October is technically a positive month for risk assets, but with some fascinating bifurcation: it often starts badly, but ends strong.
From 1998-2017, the average return over the first 10 days of October was -0.4%. The rest of the month? +2.0%.
Finally, we'll also note that third-quarter earnings season is about to kick off in earnest tomorrow. And analysts are expecting strong sales and profit growth for the third straight quarter.
In the meantime, today did bring some good news for one area of the market...
Despite the continued selloff in stocks, precious metals had one of their best days this year.
Gold jumped 3% to a fresh two-month high of nearly $1,230 an ounce. Silver rose more than 2% as well.
Better yet, as you can see in the following charts, both gold and gold-mining stocks have now created clear uptrends of higher highs and higher lows for the first time in months...
Now, we know what you're probably thinking...
Gold and gold stocks have made several similar moves over the past couple years, only to eventually reverse course and trade lower. We know the mailbag is likely to fill up with nasty letters from many of you for even suggesting it here today.
The reality is most folks – even many Stansberry Research subscribers – have completely given up on the sector. And bearish sentiment among speculative traders has become more extreme than ever before.
But that's exactly why you should be paying attention. When sentiment becomes stretched this far, a small breakout can lead to huge gains in a short period of time.
For example, the last time speculators were anywhere near this bearish was in February 2016. The small breakout that followed that extreme saw gold rise about 15% in just four weeks, and roughly 25% over the following five months. Meanwhile, gold stocks – which are leveraged bets on gold prices – soared roughly 50% and 100%, respectively, over the same period of time.
Today, sentiment is even more extreme... which means we could easily see even bigger gains this time around.
New 52-week highs (as of 10/10/18): none.
In today's mailbag: A reader agrees with our assessment of Bill Ackman's Starbucks bet... several folks weigh in on this week's volatility... and Steve Sjuggerud offers some "Melt Up" reassurance. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.
"Stansberry Team, my thoughts exactly when I heard about Ackman's stake in Starbucks. I'm betting there are even more closet Stansberry readers among hedge fund managers. I've been buying Starbucks shares since Dan's recommendation and collecting nice covered call premiums while awaiting the dividends. Perhaps this is a turning point at Pershing Square after Dr. Sjuggerud castigated Mr. Ackman for his failure to follow the cornerstones of sound investment management: risk adjusted position sizing and trailing stops?? Would it be too smarmy if Stansberry subscribers took up a collection to purchase a gift subscription to TradeStops for Mr. Ackman?" – Paid-up subscriber Sherman T.
"Well, I DID sleep soundly last night. Just prior to bed there was a sharp pain that came from viewing my aggregate loss for the day of 2-1/4%, but... it is what it is ... and taking much of your advice to roll with these punches while tightening up the plan, helps me sleep better other nights as well. Thanks." – Paid-up subscriber Larry B.
"Sleeping soundly... adding more gold and a little to my small cap ETF and waiting for Steve's presentation!" – Paid-up subscriber Martin M.
"Dear Dr. Sjuggerud, based on the latest market actions, do you still believe your research and analysis of a market melt-up in the coming weeks/months? Are you changing your position due to how the market is behaving now and the Fed's aggressive rate hike plan? Is a market melt-up still possible after 10 years of massive bull run? I would like to know your latest position on the melt-up theory. Thanks." – Paid-up subscriber Bhanu S.
Steve Sjuggerud comment: The Dow lost almost 1,400 points in two days... It's hard to sugarcoat that.
But you have to keep in mind that stock markets have corrections. (Corrections are typically defined as a fall of 10% from new highs.)
During the last great Melt Up in stocks – the dot-com boom of the late 1990s – the Nasdaq actually saw five declines of roughly 10% during its final push higher... And they all happened within the last 12 months of that Melt Up.
These falls were quick. They all happened in a month or less. But they were still painful. You had to question if staying on board was the right move all five times.
Corrections are normal – even in the Melt Up phase of a stock market boom. So yes, it has been a terrible couple of days... But no, a correction (or two, or more) does not signal the end of the Melt Up.
If you'd like to learn more, I hope you'll join me for our special broadcast event on Wednesday, October 24. I'll not only be covering all these concerns in detail, but I'll also share a major prediction on-air for the first time. You'll even get one of my favorite Melt Up recommendations that could soar 1,000% in the months ahead, absolutely free, just for tuning in. Click here to save your seat.
Regards,
Justin Brill
Baltimore, Maryland
October 11, 2018