It's Time to Prepare for More Downside
It's time to prepare for more downside... A classic bear-market rally?... Another Stansberry Research analyst is growing cautious... Don't miss Doc's urgent briefing next week...
We'll begin today's Digest with a warning...
Regular readers know we've been cautious on stocks for the past several months.
That remains the case today. Despite the sharp rebound to start the year – which has seen the S&P 500 rally more than 10% off its Christmas Eve lows – we still don't think the recent sell-off is over just yet.
As we've discussed, there are several reasons for this view – which admittedly differs from many of our colleagues here at Stansberry Research – but the most important is also the simplest: Even during the worst of the decline last month, we never saw the clear signs of investor panic that typically mark a lasting bottom in stocks.
But today, I (Justin) am going to stick my neck out even further...
I believe the recent rally is ending, and another decline is about to begin. And again, the reasons are simple...
First, the rebound off the December lows has been growing progressively weaker over time. Both trading volume and market "breadth" – as measured by the NYSE advance/decline ratio – have been trending lower as the market has been rising.
In basic terms, fewer and fewer shares of fewer and fewer stocks have been carrying the broad market higher. This is typically not what you'd expect to see if the bull market had resumed.
Meanwhile, the S&P 500 is now pushing into a strong area of what technical analysts call "resistance," or a level where folks are likely to sell, and prices often stop rising. This area includes its October and November lows, its widely followed 50-day moving average, and a confluence of intermediate- and long-term trendlines.
Finally, I'll remind you that while longer-term measures of investor sentiment never reached panic levels last month, some shorter-term measures did touch an extreme. For example, the Daily Sentiment Index ("DSI") – which I've found to be a remarkably reliable contrarian indicator – fell to just 4% bulls on December 24. This was a rare bearish extreme that suggested a short-term rally was likely.
However, since then, we've seen a sharp reversal in short-term sentiment as well. The DSI has soared back to more than 50% bulls. This is just shy of the extreme reached on December 3, right before stocks plunged more than 10% in the worst Christmas sell-off in 90 years.
In short, I see the hallmarks of a textbook bear-market rally that is quickly petering out...
Now, whether this means we'll see a successful "test" of the December sell-off – where stocks make a higher low or even a slightly lower low before bottoming – or a decline to significant new lows is anyone's guess. But I believe the risk of further downside is significant.
To be clear, this is not a recommendation to sell all your stocks. As I often write, the market doesn't offer guarantees. Despite these warning signs, stocks could continue to move higher from here.
But if you were losing sleep during last month's decline, I urge you to take advantage of the recent rally to "de-risk" your portfolio a little.
Raise some cash, so you'll have "dry powder" to take advantage of lower prices down the road. Be sure to own a little gold. And if you still have a significant percentage of your net worth in stocks, consider "hedging" with a few short sales or long put options.
Of course, regular readers know we haven't been alone in our cautious stance of late...
For example, Extreme Value editor Dan Ferris has been consistently warning his readers about broad market risks for months.
Likewise, Porter and his team of analysts have continued to recommend their readers hedge against a potential bear market.
And most recently, our colleague Dr. David "Doc" Eifrig has become more concerned as well.
We think the latter is particularly noteworthy for a few reasons...
First, Doc's resume speaks for itself. He spent more than a decade working for some of the top firms on Wall Street before returning to school to become a medical doctor. All told, he has been studying the financial markets closely for more than 30 years now.
Second, along with Steve Sjuggerud, Doc has been among the most consistently bullish Stansberry Research analysts over the past 10 years. Time and again, he told his readers not to worry about a bear market in stocks.
And lastly, Doc is as conservative and "no nonsense" as they come. He detests fearmongering and hyperbole. If he tells you he's getting worried, you can bet he has good reason for it.
But you don't have to take our word for it...
You can hear it from directly from Doc himself, during a special online briefing next Wednesday, January 23, at 8 p.m. Eastern time.
You see, because he believes this message is so important, he has decided to share it with every interested Stansberry Research reader, and not just his paid subscribers.
This event is absolutely free to attend. Click here to reserve your spot.
New 52-week highs (as of 1/15/19): ResMed (RMD).
Bear or bull, what's your call? Weigh in at feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
January 16, 2019