Panic Triggered the Circuit Breakers
An appropriate bull market killer... Panic triggered the circuit breakers... 'It is rational for society to be panicking'... Don't get 'over your skis'... Dan Ferris' 'Trade of the Year' looks like the trade of the year...
In a way, it seems fitting that an actual virus might kill this bull market...
After all, regular Digest readers know we've pounded the table for years about how the Federal Reserve has spent the better part of the past decade artificially boosting the economy's immune system...
It has gotten to the point where interest rates may be headed to zero... and Fed officials are now suggesting entirely new remedies to fight a recession, such as buying stocks themselves on behalf of the country...
Boston Fed President Eric Rosengren said as much during a speech on Friday... The question (not in these exact words): What could the central bank do after emptying all the medicine out of its interest-rate cutting and U.S. Treasury-buying hypodermic needle (our colleague Dan Ferris' analogy)?
Rosengren said...
We should allow the central bank to purchase a broader range of securities or assets.
For some reason, that statement tempered another down day for the major U.S. indexes on Friday (as if the world has learned nothing from Japan's stock-buying failures).
In any case, the "stable" times didn't last long.
Panic triggered the circuit breakers this morning...
The benchmark S&P 500 Index fell more than 7% on today's open, triggering a mandatory trading halt on the New York Stock Exchange to give investors time to digest what was going on...
And well, that was a lot...
Oil prices tanking... The coronavirus spreading... Major global markets down... Credit markets rattling... New-age trading platforms like Robinhood crashing.
We said aloud this morning, quoting Lloyd Christmas (Jim Carrey) in the movie Dumb and Dumber, "We've got no food. We've got no jobs. Our pets' heads are falling off!"
Trading stopped for 15 minutes this morning. And this evening... applying the commonly used 20% down definition for a "bear market"... we're mere percentage points away from the end of the record-long bull market...
As of today's close, the S&P 500 has fallen more than 18% from its most recent high of 3,386 on February 19. It was down 7.6% today. If the index closes at or below 2,708.92, we'll be in bear market territory.
On the other hand, if the bull keeps running, it will be an epic comeback.
Meanwhile, in just 10 trading days, the Dow Jones Composite Average went from its 52-week high to a 52-week low...
That's the fastest move on record, going back to the 1930s.
Blame it on the social media era, an unexpected "Black Swan" event, or the other shoe dropping on a decade of "easy money" policies. But no matter what... things are happening fast, and it's hard to keep up and keep perspective. (Hence the circuit breakers.)
Oil prices took their biggest dive in 30 years today, the result of escalation of the conflict between Russian President Vladimir Putin and Saudi Arabia's leadership that we wrote about in Friday's Digest. (It will be a good week to head to the gas station.)
Dallas Fed President Steven Kaplan said last week that the Fed's "emergency" rate cut was more about the troubling credit markets, as we've long warned about. The White House might get involved with fiscal policies to help things.
And the stats about coronavirus keep getting worse...
According to Johns Hopkins University here in Baltimore, the virus – for which a vaccine or treatment still does not exist – has now infected at least 113,000 people over 111 countries. And it has killed close to 4,000, roughly 75% of the deaths coming in China's Hubei province, ground zero for the outbreak.
It all sounds ominous and possibly overwhelming, but hopefully you can take a breath and keep perspective.
As "Mr. Black Swan" himself – writer and former options trader Nassim Taleb, who made the phrase famous in his 2007 book – said earlier today in a video from his home about the world's reaction to the coronavirus...
It is rational for society to be panicking. It is not rational for you and I to be panicking.
On days like today, the words of our founder Porter Stansberry ring in our heads...
Our job is to give investors the information we'd most want if our roles were reversed.
That's why we've repeatedly preached here – especially over the last month...
Stick to a plan based on your investment goals, use tools like stop losses and make sure you're adhering to proper asset allocation (maybe buy some "chaos hedge" assets like gold, which held up today)...
In other words, when it hits the fan – when the inevitable bear market happens – make sure you've prepared so that your portfolio doesn't completely fall apart.
Our Director of Research Austin Root touched on this guidance in a special note he sent to every single one of our Stansberry Research subscribers today. (You can read it in its entirety here.) Austin wrote, in part...
While we don't want you to blindly sell great companies at bad prices simply because it looks like everyone is doing that... you should make sure your financial house is in order and not overextended.
Now is not the time to be "out over your skis" with your portfolio. Don't buy into this dip if you can't afford to. And sell some things if you must. (On a more positive note, now may be a GREAT time to go through with that mortgage refinance – rates have never been lower.)
He also urged readers not to panic...
We've seen big drops in the market before, and we'll see more after this one.
Stocks tend to move wildly in the short term as the world tries to assess new information and reprice companies to fit what it learns.
While others rush to snap decisions, we encourage you to stop, take a deep breath, and focus on making the best long-term decisions for you.
As for the short term, we checked in today with our resident technical trader Greg Diamond...
Anyone who has been following the Digest or Greg's Ten Stock Trader over the last few weeks knows he has absolutely nailed the "key levels" amid all the volatility we've seen.
And this morning – and over the weekend, in fact – he updated his readers once again, saying that although we may see a "relief rally" soon, he's bearish moving ahead. Greg told us in private e-mail this morning...
The long-term setup is clear... Only an [S&P 500] close above 3,400 will kill this bear. Meaning the bigger trend is down unless that level is broken.
The lower high last week at 3,130 in the S&P 500 is gigantic. The levels to watch ahead of this secondary high is 2,865-2,905 and then 2,985-3,005.
The 200-Day Moving Average sits at 3,051. That's another big level to watch.
Greg said the next two weeks will be critical to which direction the broader market may be headed, and that he expects the Fed to step in and do something...
From a timing perspective, the rest of March will be important on a Fed-induced rally.
We saw the market sell off on a 50 basis point "emergency cut" in interest rates. Another cut won't matter much either. Any rally that falls short of 3,130 into the end of March is a selling opportunity.
In my opinion anything the Fed does short of quantitative easing or outright buying stocks will do little to change the bear structure now in place. They are stuck between a rock and a hard place.
Our colleague Dr. David 'Doc' Eifrig and his research team said sometimes the best move is to do nothing at all...
Doc and his team published their regularly scheduled issue of Advanced Options today. But amid the market volatility, they didn't force a trade. From today's issue...
We'd love to tell you we know what will happen. In a sense, that's what you're here for. You want someone to help you navigate markets and make money.
But what you really need is someone who will protect your money like it is their own.
That's what we're doing today. We could make predictions with false confidence if we wanted to – but your capital would be at risk.
Sometimes not losing as much as everyone else is a win itself...
At the same time, our DailyWealth Trader gang pounced on a few buying opportunities...
Editors Ben Morris and Drew McConnell told readers around midday...
You'll make better decisions if you keep a cool head.
This isn't the end of the world. In fact, all this craziness could create some incredible buying opportunities...
With that in mind, they recommended placing a trio of "stink bids." These are orders to buy an asset at a significantly lower price.
Because your buy price is so low, you don't necessarily expect a stink bid to be filled...
But if it does get filled – in a flash crash scenario, for example (the ones that mandatory "circuit breakers" are designed to prevent) – you'll likely be rewarded handsomely, and quickly. As Ben and Drew said...
This drop could be your best opportunity to profit all year.
Finally, Dan's proposed 'Trade of the Year' looks like... well, the trade of the year...
If you read Dan's February 25 Digest in which he suggested buying short-term bonds via the iShares 20+ Year Treasury Bond Fund (TLT), we urge you to go back and read it.
And if you took his advice, congratulations.
While most other assets have taken a dive the last few weeks, bonds have reached record highs. TLT is up close to 15% since Dan mentioned it in that Digest. He wrote then...
As central bankers fight global economic contagion aggravated by the viral contagion raging in China and other countries, it'll likely be a profitable trade for the next four to eight months.
In fact, as I said earlier... it could easily be the trade of the year for 2020.
So far, it's exactly that. We'll be back with more tomorrow.
New 52-week highs (as of 3/6/20): SPDR Gold Shares (GLD), Invesco Value Municipal Income Trust (IIM), iShares 1-3 Year Treasury Bond Fund (SHY), and Vanguard Inflation-Protected Securities Fund (VIPSX).
In today's mailbag, one subscriber pledges his allegiance to Jim Beam, another gives Saudi Arabia's leadership a history lesson, and we received another glowing piece of feedback for Greg Diamond... Do you have a question or comment? As always, e-mail us at feedback@stansberryresearch.com.
"I'm not too worried about the Corona Virus... but if they ever discover a Jim Beam Virus, I'm going to be in *BIG* trouble!" – Paid-up subscriber Kurt S.
"Great essay as usual on March 6th! One point you mentioned is Saudi Arabia's position on oil (it wants and needs $60 a barrel to cover its national spending). This is reminiscent of the problems Spain encountered in the 16th and 17th centuries.
"Spain had more gold and silver (especially silver from the huge deposits discovered in Mexico and Peru) than any other nation on Earth and began borrowing against the expected imports of these precious metals to the point where inflation took off (the silver peso became the de facto currency of the world as a result).
"The Crown began borrowing against expected imports of gold and silver from the New World to pay its armies in the Netherlands and Italy and bankers began charging higher and higher interest rates until half of all the gold and silver that came in from overseas went to pay interest rates. Spain went bankrupt.
"How can Saudi Arabia outspend the world's largest deposits of high grade crude oil? The Spanish Empire is the lesson they should take a look at! Even though Spain had gold and silver in unprecedented amounts it couldn't control its spending. It kept borrowing against future deliveries. Sounds like the Saudi's are heading for the last roundup!" – Paid-up subscriber Harold S.
"Greg, I just wanted to say thanks for the long hours you have been dedicated to the Ten Stock Trader subscription.
"You have produced a lot more technical analysis than what you did during Beta that are very insightful. Your recent Gann analysis on Caterpillar (Cat) is an eye-opener, especially with the volatility we are seeing today! Keep up the good work!" – Paid-up subscriber Stephen S.
All the best,
Corey McLaughlin
Baltimore, Maryland
March 9, 2020