Porter and Steve Agree
The smoke clears... Is that it for the 'volatility panic'?... What history says about the stock market now... Porter and Steve agree... Are 'cryptos' dead?
If you're a longtime Digest reader, you may have been surprised last Friday...
After all, you know Porter warned last summer that a significant stock market correction – or possibly something much worse – was now certain for the first time in years. As he explained in the August 4 Digest...
How much longer can this go on? No one knows. But for the first time since 2010, we're now hitting levels on our complacency indicator that suggest a market correction is imminent...
This indicator hasn't warned about every correction. (It correctly warned about seven of the last 10.) But it hasn't produced any "false positives," either. In other words, while it doesn't spot every correction before it arrives, when it has told us that a correction is coming, the correction always does. (To be perfectly accurate, one of the resulting corrections only saw a decline of 8.4%. All of the others were in excess of 10%.)
You can see the key threshold level in the chart above. Drops in measures of fear below this level (30) always indicate a correction or bear market within 12 months.
We don't know if the warning signal we're getting now means that the "big one" is imminent, or if we are only going to see a "small" correction. But we know something is coming. We know it's coming soon. And we know that there are huge excesses in the credit markets, in particular.
You also know that just two months later, Porter went even further...
He said that it was simply a matter of time before the so-called "short volatility" trade imploded. And he warned that this could trigger a market panic... and potentially even set off the crisis he's been predicting.
Of course, he was exactly right...
As we discussed last week, the short-vol trade did implode, just as Porter predicted. And the resulting sell-off pushed stocks into official "correction" territory – defined as a decline of 10% or more from a high – for the first time in two years.
Surely, Porter is even more bearish now?
Surely he's preparing for further downside... and the start of the serious crisis he has been predicting? Not exactly. As he explained in Friday's Digest...
I don't believe the market action this week presages a bear market. It doesn't feel like the start of a new crisis...
Where is the epicenter of this big bull market in stocks? It's tech stocks like Tesla (TSLA), Netflix (NFLX), Nvidia (NVDA), Amazon (AMZN), and Facebook (FB). All of these companies' earnings have been good or great – even Tesla, whose business model I believe will eventually implode (but hasn't... yet).
Revenues beat expectations. Losses were below forecast. The other most likely blow-up, Netflix, is performing even better than anyone thought possible, adding an incredible 8 million new subscribers last quarter. Netflix was expected to add 1.25 million new U.S. users last quarter. Instead, it added 2 million. That's a huge beat.
As he explained, we haven't seen the 'Lucent Moment' yet...
This is when one of the "darlings" of the preceding boom begins to falter... And it often marks the unofficial start of the bust to follow.
Following the Internet boom in the late 1990s, telecom firm Lucent Technologies collapsed after an earnings miss in January 2000.
Following the last bubble in housing, the failure of mortgage giants Fannie Mae and Freddie Mac kicked off the financial crisis in July 2008.
In other words, Porter doesn't believe this boom will end until we see similar signs of trouble in today's tech darlings...
And that simply isn't the case today. So rather than make him more bearish, last week's volatility has made him more bullish, at least in the near term. More from Friday's Digest...
When other investors are acting greedy, we try to become as cautious as we can... Today, we're seeing the opposite...
Investors are worried. It's possible – though not inevitable – that a real panic could emerge as forced selling leads to more volatility, which leads to more forced selling as futures dealers have to continually buy more equity puts to balance these trades. It's unclear what impact these new volatility-linked exchange-traded funds will ultimately have on the markets.
But as stocks go lower, so do the risks. And as stocks go lower, better and better opportunities will emerge. Don't begrudge these idiots for their madness. Revel in it. While lots of value is being destroyed, just as much opportunity is being created – for you.
My advice is simple... Follow your plan. You'll free up capital if the market falls further by following your trailing stops. That will give you "dry powder" when the smoke clears. Ideally, you've already put aside plenty of cash, and you have at least some non-correlated assets that will help buffer the madness.
History suggests he'll be right once more...
In a research note published earlier this week, analysts at financial-services company Canaccord Genuity noted last week's big spike in volatility created an unusual situation. As the CBOE Volatility Index ("VIX") moved above 50, it pushed one significant momentum indicator – known as the "10-week rate of change" – above 125.
The ins and outs of this particular indicator aren't the important thing to note here. All you need to know is this extreme is rare. It has only happened four times in the 25-year history of the VIX. And more important, all four instances were followed by additional short-term volatility and at least slightly lower lows in stocks.
The first occurred in September 1998, following the collapse of Long-Term Capital Management that August (which Porter mentioned on Friday). After "bouncing" off its lows, the S&P 500 fell another 4.9% over the four weeks following this signal before bottoming in early October.
The second was in October 2008 – at the peak of the last financial crisis. Again, stocks bounced... And again, they made a lower low. The S&P 500 fell another 24.8% following this signal before bottoming in March 2009.
The third followed the so-called "Flash Crash" in May 2010, while the fourth occurred during the big market decline in the summer of 2011. And like before, the S&P 500 went on to make a lower low, falling 6.0% and 2.2%, respectively.
In short, we may not be out of the woods yet. Stocks could fall to new lows in the coming weeks. But more important, history suggests it will be a great time to buy if they do.
But this wasn't the only rare extreme we saw in the market last week...
In yesterday's edition of our free DailyWealth e-letter, our colleague Steve Sjuggerud shared another. As he explained...
What we just went through was pretty extreme... The market had its worst week in more than a year – after hitting a 52-week high.
My friend Jason Goepfert of SentimenTrader.com looked back at every time this had happened before in history. He was looking for one specific condition: the worst week in a year, occurring immediately one week after a 52-week high.
As you might guess, this hasn't happened a lot – only 10 times, to be exact (not counting this latest occurrence). Jason is conservative in his "play calling." So it was interesting to read his enthusiasm after these results. Here's what he said...
All 10 signals led to a rebound over one to six months, and the risk versus reward was ridiculously skewed to the upside. There was almost no downside risk on a closing basis, while the rebounds tended to be very strong. This is one of the most skewed risk/reward ratios we've seen in any study in recent years.
Yes, you read that correctly...
This signal has a perfect track record. It has led to higher stocks prices over the following one-, three-, and six-month periods every time it has occurred.
Of course, there's no guarantee that will be the case this time. But alongside several other indicators he's following today, Steve believes it paints a compelling bullish picture. Like Porter, he believes the bull market still has further to run...
Sure, it would be great if we had more than just 10 occurrences over the past 90 years to hang our hats on. But this indicator is 10 for 10 so far. And as Jason said, the reward versus risk was "ridiculously skewed to the upside."
Today is more of a "buy" than a "sell" based on indicators like this. Follow your trailing stops, of course. But don't get spooked out of the market. I believe there's still plenty of upside ahead.
One last thing...
As you've likely heard, the recent volatility hasn't been limited to the traditional financial markets. Bitcoin and other cryptocurrencies have suffered jaw-dropping declines in the last few months as well.
After soaring to almost $20,000 in December, bitcoin plunged nearly 70% through the first week of February. Countless other "cryptos" fell even more.
If you're like many folks, you may be wondering what comes next... Has the bitcoin "bubble" burst? Or is this just the latest dramatic shakeout in the ongoing cryptocurrency boom?
To answer this question and more, we're hosting a live Q&A session with our colleague Tama Churchouse tomorrow night. Tama is the lead analyst for our corporate affiliate Stansberry Churchouse Research, and one of the most knowledgeable cryptocurrency analysts we know.
If you're even a little curious about what's going on with cryptos today, we encourage you to check it out. As always, it's absolutely free for Stansberry Research subscribers. Click here to reserve your spot now.
New 52-week highs (as of 2/13/18): CME Group (CME) and Match Group (MTCH).
In today's mailbag, two more readers weigh in on our annual Report Card. (If you missed it, you can read it right here.) We'd love to hear from you, too. Send your notes to feedback@stansberryresearch.com.
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Regards,
Justin Brill
Baltimore, Maryland
February 14, 2018