Investors Are Piling Into This Dangerous Trade Again

Chinese stocks are booming... But Sjug says it's not too late to profit... A new warning sign for stocks... Investors are piling into this dangerous trade again... Is it time to prepare for another 'volatility panic'?

Back in February, we noted an important change for Chinese stocks...

In short, after dramatically underperforming their U.S. counterparts for much of the past year, Chinese stocks were suddenly leading to the upside again.

This outperformance has continued. In fact, as Steve Sjuggerud noted in our free DailyWealth e-letter this morning, Chinese stocks are booming right now...

I've been absolutely pounding the table for you to buy Chinese stocks this year. I sure hope you've listened.

The Shanghai Composite Index is up 29% year-to-date in local currency... and 32% year-to-date in U.S.-dollar terms.

So $10,000 invested in China at the beginning of this year would be worth $13,200 today. And the year is only three months old!

If you're like most folks, you probably believe the biggest gains are behind us...

But as Steve reminded readers, when Chinese stocks begin to boom, they can really boom...

A 32% gain in a quarter would mean you missed it – in most other markets. Usually, that would be an absolutely stellar year's worth of returns in the stock market.

Heck, U.S. stocks only jumped 20%-plus in a calendar year three times during the current bull market.

You have to remember something, though... China isn't like other markets. It doesn't work by the same "rules."

So no, you haven't missed it. Not even close.

If you look at the chart below, you'll see why. It shows that – five separate times – Chinese stocks have delivered triple-digit percentage gains within 24 months. Take a look...

All told, China's entire stock market has soared by triple digits five times in the past 25 years...

And Steve believes the sixth time could be underway right now...

China's stock market is famous for huge booms and busts. And we're in the middle of one of those booms today.

China has been the best-performing market in the world so far this year. That makes it easy to assume the good times are already behind us. But they're not...

When Chinese stocks get going... THEY GO. And they're going RIGHT NOW.

The Shanghai Composite is up 32% so far this year. But you haven't missed it. History says we could see triple-digit gains over a period of two years – or even less.

Stop procrastinating. It's happening now. Don't get left behind... Get on board!

Steve shared all the details on his favorite "one click" China investment in the latest issue of his True Wealth newsletter. If you're not already reading True Wealth, you can take advantage of a 100% risk-free trial offer right here.

Here in the U.S., stocks have continued to move higher as well...

But after a historic rebound to start the year, the pace of the rally has begun to slow. And as we noted late last month, some warning signs are beginning to flash.

In particular, several measures of investor sentiment have reached bullish extremes. And two important groups of stocks – financials and small caps – have been diverging from the broad market for the past several weeks.

Today, we can add one more...

Investors are piling back into the so-called "short vol" trade again.

Regular readers may recall that shorting volatility became incredibly popular between 2016 and early 2018. During that time, stock market volatility – as measured by the CBOE Volatility Index (or "VIX") – moved lower and lower as stocks moved higher.

As often happens in the markets, folks began to believe this was a one-way bet. They assumed that because volatility had been falling for years, it would continue to fall... And they piled into trades designed to rise as the VIX moved lower.

For a while, these folks looked brilliant...

However, as we warned many times during that period, this trade was sure to end in disaster.

Our colleague Dan Ferris may have put it best: Shorting the VIX is like "picking up nickels in front of a steamroller." You make a little bit of money... until you get crushed.

Sooner or later, volatility would return to the markets. And this massive one-sided bet meant the VIX could move dramatically higher when it did.

Many of these traders could be wiped out. And because the VIX and stocks tend to move inversely, we warned a sharp correction was likely as well.

That's exactly what happened in early February 2018...

The VIX surged more than 400% in less than two weeks – including more than 115% on February 5, its largest one-day rise on record. And the benchmark S&P 500 plunged nearly 10% from its late-January high.

We saw a similar situation last summer as folks piled into record short bets on the VIX for a second time. And once again, it ended in tears.

This time, the VIX more than tripled from its September lows through late December. And stocks lost nearly 20% over that time.

But it appears many folks still haven't learned their lesson...

Today, they're once again piling into the short vol trade. In fact, according to the latest Commitments of Traders report, futures traders are now making even bigger short bets on the VIX than either of these last two times.

The following chart puts these extremes in perspective...

Perhaps the third time will be the charm?

As always, these signals don't guarantee a reversal is imminent. Sentiment extremes can always become even more extreme before they finally reverse.

But history suggests it's just a matter of time before the VIX moves higher and stocks move lower. And these extremes suggest it could be another violent move when they do.

New 52-week highs (as of 4/3/19): BHP (BBL), CBRE Group (CBRE), Hershey (HSY), Ionis Pharmaceuticals (IONS), Ingersoll Rand (IR), KLA-Tencor (KLAC), Anglo American (NGLOY), O'Reilly Automotive (ORLY), Rio Tinto (RIO), and W.R. Berkley (WRB).

Several readers have written in to express their support of cannabis investing. As always, send your notes to feedback@stansberryresearch.com.

"I read Doc's report about readers castigating him on the 'Pot' stock recommendations.

"First, I wanted to second Doc's response that 'if you don't like it, don't invest in it.' I don't think any Newsletter can conform to all readers social norm requirements. Hershey may be objectionable to anti-sugar crusaders, MO may be objectionable to anti-smoking crusaders, and yes, also to anti-pot crusaders, GOOG and FB to privacy advocates, etc., etc., etc. until there are no stocks left to invest in.

"Personally, I bought into the Cannabis Capitalist portfolio on 3/29 and I am up 6.5% in the 3 days of trading since then. I realize that this is a very short time span, but I am happy so far. I also personally use CBD oil to combat my arthritis. It seems to help. There is obvious good in cannabis, that people may not appreciate. Thanks Doc and [Cannabis Capitalist editor] Tom [Carroll]!" – Paid-up subscriber O.L.

"Doc, I read your reply to U.A. in [yesterday's Digest] and couldn't agree with your response more. While I don't use, nor necessarily support cannabis being legalized for recreational use, I do see the medicinal properties it has to offer and the investment opportunities.

"I was on the cannabis call last week and was impressed with the presentation and Thomas Carroll. I invested in two of the four recommendations in the inaugural newsletter. The first recommendation is up 4.49% after only five days and the fourth of the recommendations listed is up 26.25% in the same five days. Impressive! I've been an Alliance member for the last 9 years and have more than paid for the cost many times over utilizing advice and information from the Stansberry family of newsletters.

"Doc, I especially look forward to each of your four newsletters and have followed many of your recommendations over the years. Thank you for all of your health advice, recommendations for saving money, and teaching us how to invest wisely and profitably. Keep up the great work!" – Paid-up Stansberry Alliance member Thomas M.

"Bravo for your response to the reader who criticized Dr. Eifrig's stance on cannabis! I have been prescribing dronabinol (THC) to my HIV/AIDS patients since it became available MANY years ago. It has proven both safe and useful.

"I also treat chronic pain and opioid dependent folks. Many have found pot to be very useful in controlling the amount of opioids they take, and the anxiety some have. And now that medical marijuana is available in my state (NY) 'opioid dependence' is in fact a diagnosis that qualifies one to receive it.

"About the only useful thing that banning marijuana many years ago did was to fill the pockets, tax free, of the underground suppliers and dealers. Of course, it also paved the way for more prison jobs and construction." – Paid-up subscriber Neal R.

"Doc, I am a surgeon – you hit it right on the head. The gall of that paid-up subscriber to chastise you for your insight. I tell many patients it is safer to use medical pot than pain meds, even after surgery. Smoking it not a great idea, but edibles are safe and effective. I studied pot in college at University of Michigan. My biochem professor had the largest lab (2 floors) and had devoted 3 decades to pot research. He had over a dozen grad students. Needless to say THC and pot in general is WAY WAY safer and has much less in the way of negative effects on all organ systems (we studied brain, kidney, liver, heart in rats) vs ethanol.

"My professor grew his own strains and had for years. At our farewell dinner at his house he made this fantastic dinner but used THC butter to cook with (no taste or odor) and 'forgot' to tell us. Let's just say his artwork (electronic micrographs of all sorts of things like a fly eye...) looked bizarre as the night went on.

"It is about time that the Feds legalize pot especially for medicinal purposes. Just like any drug, natural or synthetic, too much can be bad. But in this case, it is much safer than most – can't OD and unless someone uses a lot of it daily for decades (or before 18 as the brain is developing) the benefits WAY outweigh the risks compared to so many things, even energy drinks (had a friend whose 40 something daughter died of sudden death arrhythmia because she was addicted to energy drinks which are sold EVERYWHERE)." – Paid-up subscriber David B.

Regards,

Justin Brill
Baltimore, Maryland
April 4, 2019