It's Time to Prepare for a Correction
A big yawn from the Federal Reserve... Another blowout quarter from Facebook... Two billion users and counting... More trouble for Snap... Déjà vu for the VIX... It's time to prepare for a correction... Your last chance to join Stansberry's Big Trade...
A big yawn from the Federal Reserve...
Yesterday, the Federal Reserve announced its July policy decision, and there were no surprises.
As expected, the Fed held short-term rates unchanged at 1%-1.25%. It said it expects price inflation to remain "somewhat below 2% in the near term," but still thinks inflation will "stabilize" near its official 2% target over the medium term. It said that risks to its economic outlook appear "roughly balanced" at this time. And it said that it still expects to begin unwinding its $4.5 trillion bond portfolio relatively soon.
In other words... once again, there's nothing to see here.
The Fed has historically announced significant policy changes only at meetings that are followed by scheduled press conferences. As the August meeting has no scheduled press conference, the Fed is unlikely to make any additional changes to interest rates or its balance sheet until September at the earliest.
The world's most valuable network keeps getting bigger...
Yesterday, Stansberry's Investment Advisory recommendation Facebook (FB) reported second-quarter earnings. And once again, they blew expectations out of the water.
The social-media giant reported that revenues rose 45% year over year to $9.3 billion last quarter. (Analysts had expected $9.2 billion.) Profits grew even faster... Earnings per share soared 69% to $1.32, compared with estimates of just $1.13.
Facebook also reported that its user base continues to grow rapidly. Daily active users (DAUs) rose to 1.32 billion, up from 1.28 billion last quarter. Meanwhile, monthly active users (MAUs) cracked a mind-boggling 2 billion for the first time. That represents more than one out of every four people on the planet.
Most notably, the company's growth continues to be driven by mobile – and increasingly mobile-video – advertising. As financial-news network CNBC reported...
Mobile ad sales now provide most of Facebook's revenue and hit $8 billion for the quarter, a jump of 53% and more than analysts expected.
"As content consumption changes, online marketers are saying, 'I want to reach consumers wherever they are, whatever device they're using," said David Staas, president of NinthDecimal, which provides location data and other digital marketing tools to 250 ad agencies, brand advertisers and media companies. "Facebook is well-positioned" to take advantage of the trend, Staas told CNBC in a phone interview.
The market for digital video (not including traditional TV ads) is projected to rise 19% this year to $11.7 billion, according to data from the research firm eMarketer, cited in a May report from the Interactive Advertising Bureau.
Facebook's revenue growth rate is twice that of Alphabet unit Google, its larger rival in the online ad market, which earlier this week reported ad sales growth of 19% for the second quarter.
And this trend will likely continue as the market for mobile video grows. As Porter and his team explained when they originally recommended shares in the December issue of Stansberry's Investment Advisory...
Facebook is building out its network to prepare for three emerging tech trends:
- Secure mobile video calls
- Ultrahigh-definition (so-called "4K") images on the desktop
- 3-D images on smartphones
The first of these trends, secure mobile video calls, just rolled out a few weeks ago...
The second trend is the increasing resolution of computer and mobile screens up to the 4K standard, which represents four times the resolution of current, standard HD.
For Facebook, this means four times the storage needs per photo, times many billions of photos... Accommodating this on desktops and laptops is the start, but it will end up as a mobile format, too. In other words, smart phones designed in 2018 and built by the billions in 2020 could have 4K screens.
That brings us to the third trend... 3-D, which Facebook is already exploring for gaming with its acquisition of Oculus, a company building virtual-reality glasses for playing fully immersive video games...
Even if Oculus ends up as an experiment for Facebook, the software that drives the technology is critical to understand. Smart phones themselves are increasingly capable of playing immersive 3-D video games. In turn, future smartphones might include a double camera that captures the world in 3-D for playback.
For Facebook – and WhatsApp, and Instagram – these 3-D movies from users are the killer app. Facebook is gearing up now to support Oculus, and that will support any other sort of 3-D movie, too.
Looking at these three major technical trends, we see Facebook preparing to monetize them. More than anything we see in its past growth rates, this assures us that Facebook has a bright future.
Facebook shares jumped nearly 3% to a new all-time high of more than $170 today. Stansberry's Investment Advisory subscribers are now up almost 50% in less than eight months.
More trouble for Snap...
The news is far less rosy for shareholders of fellow social-media firm Snap (SNAP), maker of the trendy photo- and video-sharing app Snapchat.
Regular Digest readers know shares have plunged since the firm's outrageously expensive IPO in March. But the outlook didn't get any better on Wednesday...
Yesterday, global index provider FTSE Russell – whose U.S. indexes are important benchmarks for large institutional investors – said it would not include SNAP in its indexes, citing the firm's utter disregard for its shareholders. As news service Reuters reported last night...
FTSE Russell said on Wednesday it planned to exclude Snap from its widely followed stock indexes because the owner of the Snapchat messaging app has an unusual share structure that denies voting rights to investors...
It plans to require new constituents of its indexes to have at least 5% of their voting rights in the hands of public shareholders, though current constituents will be given a five-year grace period to comply.
FTSE Russell Chief Executive Mark Makepeace told Reuters in an interview many of his clients had worried that Snap's structure could set a bad precedent. "There were strong opinions that voting rights are an important issue. For shareholders to perform their function they have to be able to influence a company," he said. "Shareholders won't be able to hold boards accountable if they don't have voting rights," Makepeace said.
This likely portends more selling ahead.
Index inclusion tends to bring large amounts of institutional money into a stock. And as our colleague Scott Garliss noted this morning in the Stansberry Newswire, our real-time news and trading service, many IPO investors were likely sold on the promise that this institutional buying would push shares higher. Now, that is no longer the case...
If you're an account that has been hanging on to these shares during the pullback because you were hoping the prospect of index inclusion may help things, guess what? You just lost another reason to own this name. SNAP is likely still a short, as new holders are going to be blowing out.
Another day, another new low in complacency...
Earlier this week, we noted that the market's so-called "fear gauge" – the CBOE Volatility Index ("VIX") – briefly breached its all-time closing low. As we wrote in Tuesday's Digest...
The VIX plunged as low as 9.04 this morning...
That's well below the previous closing low of 9.31 set on December 22, 1993, and just shy of the all-time intraday low of 8.89, set five days later. Today also marked the eighth consecutive close below 10, which has never happened before.
How long will this trend continue? Unfortunately, we have no way to know. What we can tell you with absolutely certainty is that today's tranquility won't last forever.
Well, yesterday volatility plunged again. The VIX fell as low as 8.84, setting a new all-time intraday low. And it closed below 10 once again for a record 10th consecutive time.
Make no mistake: Investors are dangerously complacent today.
It's time to prepare for a correction...
As we mentioned on Tuesday, we can't say for certain when fear will return to the market. But we're officially "on watch."
You see, the VIX also made what traders call a bullish "key reversal" yesterday. This is when an asset or financial instrument opens below the previous close and falls to a new low before reversing higher and closing above the previous high.
Of course, no indicator is perfect. But key reversals are rare and relatively reliable as chart patterns go. And they tend to be most reliable following a strong trend. (We'd argue the two-year chart of the VIX above qualifies as a "strong trend.")
As we write, volatility is higher again today. It's currently up more than 10%, and trading back above 10 for the first time in weeks.
Meanwhile, stocks have reversed lower. The benchmark S&P 500 Index has fallen about 0.5%, while the tech-heavy Nasdaq Composite Index is down more than 1%. These are still tiny moves, but they could be the start of something larger.
To be clear, we aren't turning bearish just yet... And we certainly aren't telling you to sell all your stocks. But as we've discussed for months, we're long overdue for a correction. A pullback of 5%-10% or more would be normal, and even healthy, here. And it would set the stage for the final inning of the "Melt Up" Steve Sjuggerud has been predicting.
So what should you do with this information? Again, it's not a reason to sell. But if you're heavily long stocks today, as many readers are, we urge you to add some "portfolio insurance" immediately.
Assuming you're already holding gold and some extra cash, this means hedging your portfolio by adding a few short positions in troubled companies that are likely to underperform the market. Or better yet, by taking advantage of today's record-low volatility to buy a few cheap, long-dated put options on these same stocks.
Your last chance to join Stansberry's Big Trade at a huge discount...
This is exactly what Porter and his team have been recommending in their Stansberry's Big Trade service. This strategy allows you to protect your entire portfolio while risking just a tiny fraction of your capital to do so.
When volatility soars – and again, it's simply a matter of time before it does – these positions can soar hundreds and even thousands of percent virtually overnight. This means just a handful of cheap positions can more than offset any potential drawdowns in your broad portfolio.
Of course, regular Digest readers have heard this all before... But if you still haven't taken our advice, you're running out of time.
Not only could volatility be moving higher soon, but your chance to try Stansberry's Big Trade at a massive discount ends tonight at midnight Eastern time. After that, all new subscribers will pay the full retail price.
If you've been on the fence, we urge you to take another look tonight. Click here to learn more about Stansberry's Big Trade.
New 52-week highs (as of 7/26/17): Automatic Data Processing (ADP), Amazon (AMZN), Allianz (AZSEY), Boeing (BA), Alibaba (BABA), Bancroft Fund (BCV), Baidu (BIDU), iShares MSCI BRIC Fund (BKF), Global X China Financials Fund (CHIX), Ctrip.com (CTRP), WisdomTree Emerging Markets High Dividend Fund (DEM), Euronet Worldwide (EEFT), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Singapore Capped Fund (EWS), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), iShares China Large-Cap Fund (FXI), PureFunds ISE Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), JD.com (JD), iPath Bloomberg Copper Subindex Total Return Fund (JJC), KraneShares CSI China Internet Fund (KWEB), iShares MSCI China Index Fund (MCHI), NVR (NVR), iShares MSCI India Small-Cap Fund (SMIN), ProShares Ultra S&P 500 Fund (SSO), Verisign (VRSN), ProShares Ultra FTSE China 50 Fund (XPP), Direxion Daily FTSE China Bull 3X Fund (YINN), and short position in IBM (IBM).
A quiet day in the mailbag... praise from a longtime Stansberry Alliance member, and an incoherent rant from an angry reader. Send your best – and worst – to feedback@stansberryresearch.com.
"Porter... I started with several Stansberry subscriptions and then moved up to the Alliance as resources allowed one year. You have a great group of honest analysts and to me the education over these years has been worth the costs. I wish my retirement/financial knowledge had been part of my earlier education." – Paid-up Stansberry Alliance member Mark P.
"Sell your stocks and bonds, take all your gold and silver and go hide in another country until our destruction is complete. Then you can come back and say 'I told you so'. In the meantime stop preaching the end of the world and leave us alone in our ignorance." – Paid-up subscriber Stan B.
Brill comment: Um... what?
Regards,
Justin Brill Baltimore, Maryland July 27, 2017