The Market Hasn't Been This 'Stretched' in Years
Another warning sign is flashing... The market hasn't been this 'stretched' in years... Prepare, don't panic... The simplest, easiest, and fastest way to 'bulletproof' your portfolio...
Another warning sign is flashing...
Last week, we noted that by one important measure, the market is as "stretched" as it has been in years. As we wrote in the January 8 Digest...
The RSI is a trusted momentum indicator, with values ranging from 0 to 100. When an asset quickly falls, it can enter "oversold" territory with an RSI below 30. This signals that the asset may be due for a rally.
But the opposite is true, too. When an asset rises faster than normal, it can become "overbought," with an RSI above 70. This is usually a time for caution... and a signal that a correction may be around the corner.
Right now, the S&P 500's monthly RSI reading is sitting at 86. As you can see from the following chart, it's at its highest level since the dot-com bubble of the late 1990s...
As we explained, this doesn't mean the market will crash tomorrow...
Not every overbought extreme
But along with other signs of "froth" in the market today, this extreme suggests a pullback could begin at any time.
But that isn't the only reason for caution...
Longtime readers may be familiar with the 200-day moving average ("DMA"). This indicator is considered a rough gauge of the market's long-term trend.
During bull markets, stocks tend to spend most of their time above the 200-DMA. During bear markets, they spend most of their time below it. And perhaps most important, stocks rarely stray too far from this line in either direction before returning to it.
The following chart of the S&P 500 Index shows how it works. As you can see, since stocks moved back above this trendline following the financial crisis in 2009, they have rarely traded below it...
You'll also notice that whenever stocks have rallied significantly above this line, they have eventually come back to "test" it – touching it or even moving below it briefly – before continuing higher.
Which brings us to today...
Right now, the S&P is nearly 12% above the 200-DMA. And it hasn't "tested" it in more than a year.
This is unusual... In fact, the market has only been this stretched above the 200-DMA three other times since the rally began. And each of those cases preceded a sharp correction over the next few months.
As always, we never recommend making investment decisions based on indicators alone. And like the RSI
But history is clear: It's simply a matter of time before the market returns to its 200-DMA. And like a rubber band, the further it stretches, the sharper that move is likely to be.
Again, none of these warning signs are a reason to panic...
As we've discussed, several other indicators continue to give the "green light" today. This suggests the next correction is likely to be another buying opportunity rather than the start of a true bear market.
But as Porter noted in Friday's Digest, even if he's correct and a serious crisis is approaching, selling your stocks now could be a terrible mistake...
Now... I've done my best to show you the macro framework as I see it... I hope you understand why it's particularly important this year. But honestly, it really shouldn't matter all that much to your investment strategy.
Why not? Because you can't know if I will be right and a bear market will develop soon. And even if I'm 100% right, you could still easily make your biggest gains of this cycle in the final few months of the bull market.
In other words, even if there is a bear market and even if the markets as a whole end up down for the year, you could still make a lot of money by simply following your trailing stop losses and hanging on as long as you can.
So while I think you should be aware of these macro risks... and while I believe they're even more important this year than they have been in more than a decade... I think it's far more important that you simply follow sound investing principles, rather than try to time the market.
If you missed Friday's Digest, be sure to catch up here. And if you're looking for more help preparing your portfolio for whatever comes next, be sure to join us next week for a special live discussion about our Stansberry Portfolio Solutions product.
As longtime readers may recall, we launched this product last February to take all the guesswork out of creating and managing a "bulletproof" portfolio. The results and feedback from last year's members
This event is absolutely free for all Stansberry Research subscribers. Click here to learn more and reserve your spot now.
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In today's mailbag, several more subscribers weigh in on Porter's Friday Digest and TradeStops. Send your notes to feedback@stansberryresearch.com.
"Hey Porter, I am now a lifetime Alliance member as well as a lifetime TradeStops member. As a relative newbie to the club, I can say that I not only listen to what you say, but I take it to heart and follow through by acting on your advice. Although I invest in a number of Stansberry offerings, my core Stansberry holdings are in the Capital Portfolio.
"As I mentioned to you in a previous writing, I have made a few modifications to my Capital Portfolio. For example, I won't invest in Monsanto because of the damage they have and are causing to our environment. I substituted another
"So, there you have it, Porter. I guess I can say I proved you wrong by actually following your recommendations instead of ignoring them. I deeply appreciate how right you and your whole team are in your amazing work, and am happy to overlook your 'shortcomings' in the wrong department." – Paid-up Stansberry Alliance member Brent Anderson
"Thank you, Porter and friends! I never thought in a lifetime I'd open my brokerage account and see 25% in the green for my open positions in total and not be worried that my investment mix is too aggressive. I sleep well at night and I think maybe I've learned something along the way." – Paid-up subscriber Marty S.
"I cannot say enough about the service Porter and colleagues provide to me and my fellow subscribers. I have been investing for over 30 years and never have I felt so much peace and confidence in the direction of my investments. Steve has hit some home runs! No question there. Porter, your crystal ball is always early but often insanely accurate. I made some great profits on Fannie Mae and Freddie Mac. I would have NEVER bought them without your insight.
"Right now, I feel like a genius but I keep hearing that voice in the background telling me 'don't confuse genius with a bull market.' I have done that before and no matter how hard I try, I know that the easy money being made today cannot continue. I am still invested, still seeing profits but I have been skimming. 10% here, 20% there, and slowly taking some money off the table. I sleep well at night, at least concerning my portfolio. Keep up the good work. Use the crystal ball to alert us to the inevitable correction that MUST occur and help us to make some great profits in the meantime." – Paid-up subscriber Mitchell Farrell
Regards,
Justin Brill
Baltimore, Maryland
January 17, 2018