The market is in 'no man's land'... What to do while you wait... The one asset you must hold today... China's latest move on gold...
There's good reason to be cautious on the market today...
As Stansberry Research Editor in Chief Brian Hunt explained in the September 2 Digest, we believe the market is now "guilty until proven innocent"...
Given the old age of the market, the rich valuations, and the major trend damage, we believe that the stock market must "prove" its strength... Until the market does this, it should be approached with extreme caution. You could look at it like a court case where the burden of proof has been flip-flopped. The stock market is guilty until proven innocent.
To be clear, I'm not saying the market is going to crash this month. I'm not saying the market is going to crash next month. I'm not saying the market is going to crash at all.
I'm simply saying that serious damage has been done to the market's primary trend... The market could trade sideways for a year. It could decline 20% in the next year. I can't know what it will do... and neither can anyone else. But I can urge our readers to be extremely cautious toward the market.
Regular readers know Porter believes the U.S. stock market could fall another 20% to 30%... or morebefore the selling ends. And we wouldn't be surprised if that happens.
But as Brian said, no one can know for sure what the market will do next. And until proven otherwise, we believe the risk lies to the downside.
So what would it take to "prove" the selling is over? Again, there are no guarantees in the stock market, but Brian shared one important level he's keeping an eye on...
Given the trend-altering selloff, we've formed a unique stance on the market and its upside potential. Our stance might sound crazy to you at first, but we're confident it will make sense after you review our thinking. Here it is...
We believe the stock market will only offer significant potential gains if the benchmark S&P 500 breaks 2,131 to the upside. Until this number is broken to the upside, the broad market is in "no man's land" and should be approached with extreme caution.
For context, here is a five-year chart of the S&P 500 that shows where this level is:
Brian explained why he believes the 2,131 level is so important...
It would take the market higher than the previous high, which was the May 21 closing high of 2,130.82. It would mean the current selloff would be followed by a surge of buying interest... and the next leg of the bull market would be starting. It would mean the global economy is strengthening, not weakening. It would mean corporate profits are strong enough to shrug off today's big worries, which include a recession in China, excessive corporate borrowing, and excessive government borrowing.
These worries dominate the financial news. They have been on the minds of investors all year. The recent selloff has made the worries even worse and caused a lot of psychological damage. If the stock market were to break 2,131, it would go a long way toward repairing that damage. It would repair faith in the economy and the stock market.
On the other hand, if we were to see a major bear market like Porter is predicting, Brian would also begin to get bullish again...
During the 2007-2009 credit crisis, the S&P 500 suffered a 57% fall. It was the worst crash in more than 60 years. After reaching a low of 676 in March 2009, the S&P 500 rebounded 80% in just 13 months... and 215% over the next six years. This was an extraordinary time to make money in stocks. It was the kind of rebound you often see when stocks get extremely depressed.
A decline of this magnitude would wipe out an enormous amount of investor optimism... much like the last crash did. It would also drive global central banks to enact extraordinary "stimulus" programs that could goose stock markets by 100% or more... much like the 2009 stimulus programs did. I believe a decline of that magnitude would present a major opportunity.
Again, no one can be certain where the market is headed next.
It's possible that the broad market could continue higher from here. In that case, investors who wait for the S&P 500 to move above 2,131 before making major new investments in U.S. stocks may miss out on some upside. But, as Brian says, it could also save you a lot of frustration...
One of the biggest counterarguments to this "two-pronged" position on the market goes like this: If the market falls just 20% from its 2015 high to 1,702 and then rallies to 2,131, you'll miss out on that big rally.
There's no doubt that by waiting until 2,131 to get bullish, you're being conservative... and you'll miss out by not buying in after "just" a 20% decline.
But keep in mind... the market has advanced for six consecutive years. It's richly priced. For these reasons, a rally off the 1,702 level is just as likely to fizzle out and then turn lower as it is to soar past 2,131. By waiting for the market to break 2,131, you'll avoid the frustration of trying to constantly pick bottoms in what could be a long-term bear market.
To be clear, this doesn't mean we're avoiding all stocks.
As we've discussed, we recommend staying long your "winners." And we're bullish on select opportunities, like cheap "World Dominator" Appleand out-of-favor gold stocks, among others.
But if you're a conservative investor, using Brian's strategy – and waiting for a breakout or a significant decline before making big investments in U.S. stocks again – might make sense for you.
In the meantime, there's another asset everyone should be holding today. Brian and DailyWealth Trader co-editor Ben Morris explained in yesterday's Growth Stock Wire...
In late March, we called it "one of the best assets to hold in uncertain markets"... The title has since proven its merit. The asset's value has climbed 6% relative to U.S. stocks... and 10% relative to European stocks. Its value has risen 8% relative to gold... and 14% relative to silver. Its value even climbed close to 1% compared with 10-year U.S. government bonds, which are considered some of the safest assets in the world.
How has this asset performed in U.S. dollars? Well... it is the U.S. dollar. The asset is cash.
Stocks have fallen hard over the last month. If you had most of your assets in stocks, it was probably hard to stomach. Gold and silver have declined, too, but more gradually. At the same time, the value of your cash has climbed...
As they noted, when an asset falls, it isn't just a bear market in that asset. It's also a bull market in cash.
And while many new investors hate the idea of "sitting" on cash, it's actually one of the best things you can do during times like this...
When there aren't lots of great, low-risk investment ideas out there, the best idea may be to invest in cash...
Keep in mind, we're not saying you should sell everything you own. For lots of folks, holding 10%-20% of their investable assets in cash is a good amount most of the time. During less certain markets, even 30%-40% could be appropriate.
Hold however much cash makes you comfortable. If you're extremely nervous about stocks, hold more cash. Nerves lead to bad trading decisions... So you'll be better off. If you're confident that stocks are headed higher, hold less cash... But still hold some.
For more on why the world's greatest investors hold cash, check out this free interviewin the Stansberry Research Education Center.
Of course, we always recommend holding a portion of your savings in physical gold and silver as well. And that remains the case today.
Unlike positions in gold stocks, these holdings aren't speculations. We aren't looking to profit when prices soar, and we don't lose sleep when prices fall.
Instead, we view them as an alternate form of cash savings... as a form of "real" money.
While this view is still relatively uncommon here in the U.S. and other Western countries, it appears China may agree…
In a little-noticed announcement last week, China's Shanghai Gold Exchange – the largest physical bullion marketplace in the world – said it will accept physical gold as collateral on futures contracts beginning later this month. The exchange said physical gold can be used for up to 80% of margin value.
In other words, gold will be considered a true alternative to paper currency for these contracts. And it's just the latest evidence that China understands the real value of gold…
Rumors have been swirling for years that China is quietly hoarding gold for one purpose: To unseat the United States as the world's largest holder of gold… and to "dethrone" the U.S. dollar as the world's reserve currency.
The "official" update released earlier this summer by the Chinese government shows it will still be years or decades before they reach that goal.
But our colleague Matt Badiali has been following this story closely… and he believes China could be fooling the world…
According to Matt's research, China could already have more gold than the United States. And it could be preparing to shock the world with that announcement.
He believes the news could "light a fire" under the price of gold. Instead of resuming its gradual, long-term rise, gold prices could soar as much as 50% overnight.
Matt put together a presentation explaining all the details. Click hereto see for yourself.
New 52-week highs (as of 9/14/15): Inogen (INGN).
A mixed collection of reader e-mails in today's mailbag. As always, send your notes – good and bad – to feedback@stansberryresearch.com.
"Porter, that was one of your better Digests. I really enjoyed reading the personal stuff about your wife and family. Well done. Oh, one other thing. I also found it a little bit ironic that one of your senior sponsors is GoPro, a company that you have repeatedly stated is overvalued." – Paid-up subscriber Jeff Kelsey
Porter comment: Checks from overvalued businesses cash just the same as any other...
"Porter, I hope you do not receive a lot of cancellations over your recent views. You warned and prepared us for 08 very well. Walked us through the tremendous money making period of 09 & 10 (and beyond). In 2009 & 2010 when closing a trade and taking profits I would chuckle to myself wondering how all those that had cancelled their subscriptions in 08 were doing. Those that do cancel now will never know what they missed in the months to come.
"Like most of your subscribers I'm with you for the long haul. Keep talking, we're listening and most importantly learning. And if your timing is a little off or you're wrong once in a while... hell you're human. You will as you always do explain the miss in timing or how the wrong went down in plain easy to understand language so that we learn from it. That kind of learning IS PRICELESS! Your business model of, 'What we'd want to know if our roles were reversed.' is why we are here. Thank you and everyone else for all their hard work." – Paid-up subscriber Craig R.
"How disappointing to find you guys can't even agree on the current macro outlook. Dr Steve S says 'This bull market in stocks is not even close to over yet.' and you say 'In my view, there's almost certainly another 20%-30% decline ahead of us... maybe more.' Your company must be hedging your bets by being on both sides of the fence. This is a major fail in my book for a subscription service. I could find anyone to give me two answers." – Paid-up subscriber Dave
Brill comment: As we discussed above, no one can be certain where stocks are headed next. If someone assures you they can, you may want to reconsider where you're getting your advice.
More important, there's a big difference between predicting where the market is going and actually making money. Despite their difference of opinion, both Porter and Steve are prepared to protect capital and profit whether the broad market moves higher or lower from here.
And just to be clear, Porter and Steve agree on the ultimate outcome of the government's irresponsible policies. They're just in disagreement about the timing. Steve wrote a classic DailyWealth essay on the topic a year ago. You can read it for free right here.
Regards,
Justin Brill
Baltimore, Maryland
September 15, 2015
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