This Is Why We've Been Cautious

Another red day for stocks... This is why we've been cautious... A warning from the 'Bond King'... 'I'm pretty sure this is a bear market'... Complacency still reigns... Our latest 'Stock of the Week'… Congratulations to Sean Poynter!

The broad market sell-off continued today...

All three major U.S. indexes closed solidly in the red. Both the Dow and the benchmark S&P 500 fell 2.2%, while the tech-heavy Nasdaq dropped nearly 2.5%.

These indexes have now fallen roughly 11%, 13%, and 16%, respectively from their summer highs.

Today's sell-off accelerated following a warning from the so-called 'bond god' this afternoon...

During an interview on financial-news network CNBC, DoubleLine Capital CEO Jeffrey Gundlach warned that U.S. stocks were in the early stages of a bear market...

"I'm pretty sure this is a bear market," Gundlach told Scott Wapner on CNBC's "Halftime Report." "We've had pretty much all of the variables which characterize a bear market," Gundlach added...

Stocks fall into a bear market typically after "something happens that doesn't make any sense at all," Gundlach said. Cryptocurrency is the "mania" this time around, he said...

But it was only when the trade war between the U.S. and China collided with the Federal Reserve's rising interest rates that the sell-off began in earnest. In early October "suddenly the market seemed to wake up to the fact that this was real and the next day the stock market tipped over," Gundlach said. Additionally, he thinks that President Donald Trump's trade fight with China is not going to get better any time soon.

"I think [the trade war] gets worse," Gundlach said. "We're probably going to ratchet up the tariffs."

Now, as his nickname implies, Gundlach has made some prescient calls in the bond market...

Longtime readers may remember he famously called the exact bottom in interest rates in the summer of 2016. And earlier this year, he correctly predicted 10-year rates would rise back above 3% before year-end for the first time in years.

However, Gundlach has had less success with predictions outside of the credit markets over the last several years. For example, he famously bet against the Brexit vote two years ago... And while he predicted Donald Trump would win the presidency, he warned that we'd get a "scary" sell-off when he did.

In other words, while he may ultimately be correct about a bear market, this warning alone is no reason to panic.

But regular Digest readers shouldn't be surprised by the continued decline...

Time and again over the past several weeks, we've told you that the worst of the sell-off was likely not over. We've shared a number of reasons for caution, but perhaps the most important is also the simplest...

Despite sharp declines in both October and November, investors had remained remarkably complacent.

In fact, as measured by our proprietary Complacency Index, investors had actually become more complacent as stocks fell. And other reliable measures – such as the VIX Volatility Index (the market's "fear gauge") and the put/call ratio, among others – were sending a similar message: Investors simply weren't that worried about stocks.

As we noted last month, this is unusual...

Typically, we see investors become more fearful as stocks decline. At significant market bottoms – such as those that occurred in 2009, 2011, or 2016, for example – they often become downright terrified.

So these indicators suggested the correction had further to run.

Unfortunately, that continues to be the case...

Today's declines pushed both the S&P 500 and the Nasdaq below their early 2018 lows, while the Dow just narrowly escaped closing at a fresh yearly low of its own.

Yet despite these new lows, we're still not seeing the signs of fear that typically accompany a lasting bottom in stocks.

So whether Gundlach is right... or whether this is simply another sharp correction in an ongoing bull market... we continue to believe further declines are likely.

Now, make no mistake...

This could change in a hurry. As we saw during February's volatility panic, investors can move from complacency to terror virtually overnight. But until they do – until we see real signs of fear in the market – we will continue to urge caution.

Stay long, but stay hedged... And keep a close eye on your trailing stops.

New 52-week highs (as of 12/14/18): Procter & Gamble (PG).

In today's mailbag, a longtime Stansberry Alliance member weighs in on our most recent weekend Masters Series essays. As always, send your notes to feedback@stansberryresearch.com.

"I want to echo the recent message from Stansberry about the value of becoming an Alliance member. Like those staff members who are now employees, I too was attracted to Stansberry by the quality of the research (and the writing) and Porter's unique ethics -treating subscribers as he would want to be treated.

"I was lucky enough to join the Alliance more than a decade ago, and I still consider it the best investment I ever made – it's like getting an (on-going) graduate education in investing from the best university you can imagine for a one-time tuition payment and a time commitment that is entirely up to you." – Paid-up Stansberry Alliance member Al H.

Regards,

Justin Brill
Baltimore, Maryland
December 17, 2018

P.S. Last week, we mentioned our friend and Stansberry Research sponsored athlete Sean Poynter was competing for his first-ever paddle surfing world title. Well, we're thrilled to report that he did just that...

Yesterday, Sean was crowned the 2018 World Champion. Here's a short video of his emotional post-victory interview...

Congratulations, Sean!