Is the Bull Market Back?

No surprises on Tuesday... 'History says this is a positive'... Buybacks are surging again... Stocks regain a critical technical level... Is the bull market back?...

As you've likely heard by now, yesterday's midterm elections played out largely as expected...

Republicans held on to the U.S. Senate, even managing to gain a few seats in the process. Democrats regained control of the House of Representatives. And both sides were able to claim a victory.

As longtime Digest readers know, we had no "dog" in this fight. We're no fans of politicians of either stripe. But we will note that the markets appeared to be pleased with the results.

All three major U.S. indexes gapped up at the open and continued higher all day. Both the Dow and the S&P 500 surged 2.1%, while the tech-heavy Nasdaq Composite led the way with a gain of more than 2.6%.

Our colleague John Gillin summed up the bullish argument for Stansberry NewsWire readers this morning...

For months, the scenario that has been bandied about was that the Dems would take the House, and the Republicans would gain Senate seats. Lo and behold, the prognosticators nailed it.

It's common knowledge that a split Congress has, historically, been a good setup for markets. There is now a better chance to get an infrastructure deal done. Neither party wants to own it, but they realize that a bridge collapse on their watch would be an utter disaster on so many fronts.

Markets climb a wall of worry, but hate uncertainty. The elections, thankfully, are now behind us. But there remain tariffs, EM, global growth slowdown, Fed moves, and debts coming due. Thus, plenty to worry about...

History says this is a positive.

John is right...

As we noted yesterday, not only has Congressional "gridlock" typically been considered a positive, the 12 months following midterm elections has been incredibly bullish – regardless of outcome – over the past 70 years.

But this isn't the only good news for stock market bulls...

Regular readers will recall that debt-fueled corporate share repurchases – or "stock buybacks" as they're more commonly known – have been among the biggest drivers of higher stock prices over the past few years.

This trend can't go on forever. But for now, it's showing no signs of stopping. In fact, after the usual slowdown prior to earnings season in September and early October, buybacks are now accelerating once again. As the Wall Street Journal reported late last week...

Net buybacks in the month totaled just $12 billion by October 19, but jumped to $39 billion by October 29, according to estimates from JPMorgan Chase. That is more than the $30 billion recorded in September and just under the $48 billion recorded in August.

The pickup came at the close of a month that wiped more than $4 trillion in value from stocks in the U.S., Europe and Asia... That swoon has accentuated interest in buybacks.

Cosmetics firm Estée Lauder, whose shares dropped by as much as 14% during October, on Wednesday announced plans to buy back 40 million shares, or 11% of the total outstanding... Semiconductor-equipment maker Rudolph Technologies, based in Massachusetts, pointed to "undervalued market conditions" on Monday as it announced it had spent $14.3 million completing a buyback plan... This past week, International Business Machines authorized $4 billion worth of buybacks, and financial-exchanges operator Intercontinental Exchange announced a plan for repurchases worth $2 billion.

We'll also note that today's market action should have technical analysts feeling a little better as well...

Following the big rally, all three major indexes closed back above their 200-day moving averages ("DMA").

If you're not familiar, this moving average is considered a rough gauge of the market's long-term trend. During bull markets, stocks spend most of their time trading above their 200-DMAs. During bear markets, they spend most of their time below them.

Of course, moving back above these levels doesn't necessarily mean the correction is over, just as moving below them last month didn't necessarily mean the bull market was finished, either. Stocks will sometimes dip above or below these averages several times before establishing a new trend. But seeing all three major indexes regain these levels so soon after falling below them is a positive sign.

Still, we may not be out of the woods just yet...

As we mentioned yesterday, our proprietary Complacency Indicator shows that despite the sharp correction in stocks last month, investors remain extremely complacent today. In fact, unlike most corrections we've seen, investors actually became less fearful as stocks fell.

Again, this doesn't necessarily mean stocks will fall further from here, but we can't rule it out.

For now, our advice remains the same: Stay long... stay smart (hold some extra cash and gold, and consider "hedging" if you have a significant percentage of your portfolio in stocks)... and keep a close eye on your trailing stops, just in case.

New 52-week highs (as of 11/6/18): Blackstone Mortgage Trust (BXMT), Cameco (CCJ), CME Group (CME), Coca-Cola (KO), Lindsay (LNN), McDonald's (MCD), and Starbucks (SBUX).

A busy day in the mailbag: Kudos from a new subscriber... a question about brokerage accounts for non-U.S. citizens... and more confusion about trailing stops. As always, send your comments and questions to feedback@stansberryresearch.com.

"Good morning! I wanted to say thank you for always keeping all of your subscriptions very professional. I tried watching the [presentation of one of your competitors] and it was just terrible in my opinion. Sound didn't work, video kept freezing, and the little I heard I wasn't impressed with how the information was presented. Because of you guys my standards are a lot higher for what I'm willing to spend my time and money on. You've definitely set the bar high and for that I thank you.

"Looking forward to see how you guys start preparing for the marijuana boom. The book that you released was very informational, and honestly, I can't get enough of your work. Keep up the great job everyone!" – Paid-up subscriber Samuel R.

"Can you recommend a U.S broker who offers accounts to non U.S. citizens who live outside America? Thank you and regards." – Paid-up subscriber Bill L.

Brill comment: Sorry Bill, we're not familiar with any. Perhaps one of our non-U.S. Digest readers can weigh in?

"Like Bruce K, I am still baffled by your instructions about trailing stops. In your response to Bruce is this line: 'so we will continue to hold until we hit our own unique stops...' Are your stops different from those provided by TradeStops? If so, how should we TradeStops subscribers resolve those differences? I have a specific example.

"Several months ago, TradeStops notified me that MCD and JNJ had hit their stops. Following the regularly repeated instruction from Stansberry Research, I sold the next business day. Interestingly, none of the Stansberry portfolios holding those stocks got stopped out. Which seems to corroborate your line above that your stops are unique.

"Sometimes newsletters specify a hard stop or a specific trailing stop for a particular stock. But other than those special situations is TradeStops your guide?

"Porter has often said that he wants to provide his customers with the information that he'd want if our roles were reversed. Here's your chance. Do you impose judgements on top of TradeStops alerts? It's my understanding that TradeStops data is derived from individual stock performance, so SSI alerts are the same for all subscribers. But, the decision to sell is for each individual investor. If there is more to the sell decision than following TradeStops please tell us all what it is or how you make those judgments." – Paid-up Stansberry Alliance member Robert B.

Brill comment: Thank you for the question, Robert. The simple answer is that not all of our editors recommend the same types of trailing stops.

Depending on the publication – or even the particular recommendation – some may follow TradeStops "smart" trailing stops, while others may use a wider or tighter trailing stop of a fixed percentage. Occasionally – as is the case with many of Dan Ferris' Extreme Value recommendations – they may "break the rules" and use no stop at all.

But in every case, our editors always include clear, explicit guidance about their preferred trailing stop loss with every recommendation they make.

In general, we suggest you follow this advice. However, you're free to use any trailing stop loss you'd like, and some of our readers do prefer to follow TradeStops instead. The most important thing is to choose an exit strategy you're comfortable with for every position you own, and stick to it, no matter what.

"The [quote referenced in yesterday's Digest] said to remain cautious and 'hedged.' What do you mean by hedged? Or what actions should be taken to be hedged? Thank you." – Paid-up subscriber Brad A.

Brill comment: A "hedge" is just a position meant to reduce the risks in other positions you already own. Typically, as was the case with the Stansberry's Investment Advisory recommendation you mentioned, this refers to holding some select short positions (or buying some put options) to offset the stocks you own. If the broad market falls further, these hedges should rise and limit your total losses.

However, depending on personal circumstances – including how well your portfolio is diversified and how much risk you're currently taking – it might simply mean holding more cash than usual.

Regards,

Justin Brill Baltimore, Maryland November 7, 2018