This 'Perfect' Indicator Says the Worst Is Over

This 'perfect' indicator says the worst is over... The signs of a bottom are mounting... But don't ignore your trailing stops... A big day for our 'Golden Triangle' strategy...

We'll begin today's Digest on a positive note...

Over the past couple weeks, we've highlighted a number of indicators – including investor sentiment, stock market valuation and momentum, economic health, and credit market strength, among others – that suggest stocks are likely to rebound significantly in the weeks or months ahead.

Today, we'll share another...

In a note this morning, Canaccord Genuity analyst Tony Dwyer showed that the S&P 500's "Stochastic indicator" – a different measure of momentum than the relative strength index ("RSI") we mentioned earlier this month – has also become extremely oversold. As he explained...

The 14-week stochastic FINALLY closed last week at an extreme that has marked important bottoms over the past [nine] years. Ten of the 11 signals took place very close to intermediate-term lows that were quickly followed by new highs. Even the lone "poor" signal in 2011 was quickly followed by a bounce that recouped the majority of losses from peak, prior to its failure.

In other words, this extreme has a perfect 11-for-11 record since this bull market began...

In each case, stocks bottomed within weeks and rebounded sharply. And in all but one, stocks went on to new all-time highs within months as the bull market resumed.

Of course, like many of the other indicators we've discussed, this one is not a precise timing tool. Oversold markets can always become even more oversold before they reverse. But this is yet another strong sign that the worst of this correction could be over.

Of course, this begs the question...

Just yesterday, we reminded you to stick to your trailing stop losses. In general, if a stock closes below its trailing stop, we recommend selling it the next day, no questions asked.

Yet, if stocks are likely to bottom soon, wouldn't it make sense to ignore your stops – just this once – and wait for a rebound to higher prices?

Unfortunately, we can't endorse that strategy for two important reasons...

First, as we just mentioned, these indicators tell us only that a rebound is likely, not exactly when or from where it will begin. It's possible the market could still be several days or weeks from a bottom, during which time stocks could continue to fall.

If you ignore your stop now, will you be able to continue to hold on if stocks fall another 5%, 10%, or more? Or will you eventually panic and sell at even lower prices? Our experience tells us most folks inevitably do the latter.

Second, as we often say, the market offers no guarantees. While these indicators are remarkably reliable, they aren't perfect.

On extremely rare occasions – such as during the infamous stock market crashes of 1929 and 1987 – they have not worked as they usually do. To use the analogy of a rubber band, typically the further the market is stretched to the downside, the more violently it snaps back. But in these rare instances, the "band" becomes so stretched it simply breaks.

Now, let us be clear...

We're not saying we expect the broad market to crash today. By definition, the odds of this kind of event are remote. However, it's not impossible.

More important, similarly large declines in individual stocks happen far more frequently. And in either case, there is no way to be 100% certain that a small correction won't turn into a much larger decline that wipes out a huge chunk of your portfolio.

Again, it's not a perfect system... Selling a stock after it hits a trailing stop only to see it rebound shortly after can be incredibly frustrating. But this is the only surefire way to protect yourself from the risk of a catastrophic loss.

This is why we generally recommend putting a trailing stop on every position you own... and sticking to it, no matter what.

There is one potential exception to this advice, however...

As Porter discussed in the August 24 Digest, there is a case to be made for holding some stocks without a stop at all. However, this approach comes with a couple important caveats...

First, and most critically, it requires you to adopt the mindset of a private business owner. As such, it's really only applicable to high-quality businesses you intend to hold for the long term.

Second, it requires you to be extremely diligent and disciplined. You must monitor these businesses closely to be sure that your underlying investment thesis remains intact. And you must be able to manage your emotions through periods of tremendous uncertainty.

Speaking of uncertainty, there's no denying it's been a rough month for many investors...

Many of the market's best-known stocks – including some Stansberry Research recommendations – have suffered significant declines, particularly tech companies.

Amazon (AMZN) has fallen as much as 21%... Nvidia (NVDA) has fallen more than 35%... Alphabet (GOOGL) has fallen 15%... Facebook (FB) has lost nearly 13%. Even stalwarts Apple (AAPL) and Microsoft (MSFT) have fallen nearly 10%.

But there are some notable stocks that have bucked the trend...

For example, yesterday Under Armour (UAA) reported banner third-quarter earnings...

The once-struggling athletic-apparel retailer more than doubled analyst expectations for earnings per share and also beat its revenue and gross margin expectations. More important, the company raised its guidance for 2018.

And while North America revenues fell 2%, net sales were up more than 2%, buoyed by strong international sales numbers.

Investors cheered the news, sending shares up 28% for the session.

Stansberry's Credit Opportunities subscribers likely weren't surprised by the move...

Our colleague Mike DiBiase recommended they buy shares back in April.

Now, if haven't been with us for long, you may be wondering why Mike would recommend a stock in an advisory dedicated to discounted corporate bonds. The reason is simple: Mike classified Under Armour as one of his relatively rare "Golden Triangle" opportunities – one where a company's share price has fallen dramatically, while its bond prices have barely budged.

Under Armour was once a beloved growth stock whose revenues saw compounded annual growth of nearly 30% from when it went public in 2005 through 2016. But when its growth slowed to single digits in 2017, investors punished the company. By April of this year, shares had fallen almost 70% from their 2015 highs. As Mike told readers that month...

Put simply, we believe Wall Street is overreacting to short-term problems facing the company. And the bond market agrees with us... During the same time that the stock market panicked, Under Armour's only outstanding bond never sold off more than 15%.

The stock market appears to be coming around, too... Under Armour's stock has jumped more than 40% from its low to $16.35 per share today... Best of all, we believe Under Armour's uptrend is only in its early stages.

Just because Under Armour is no longer growing as quickly as it did in the beginning doesn't mean it's dead.

The problem was that Under Armour's sales in the U.S. were slowing...

But Mike laid out the argument for three key areas to fuel Under Armour's future growth...

He highlighted the increasing focus on direct-to-consumer (i.e. Internet and outlet), footwear, and international sales.

Revenues from the direct-to-consumer segment are up 7% this year. And footwear sales are up 5%. Those numbers are good, and will continue to improve. But Under Armour's growth this year has been driven by its sales outside of the U.S. As Mike continued...

Until recently, Under Armour's growth relied heavily on sales in the U.S. That's why the slowing numbers in 2016 spooked equity investors. But now, international sales are ramping up. They've become the company's most important engine for growth...

In 2014, Under Armour only generated about 9% of its revenue from outside the U.S. But last year, the company's international sales ($1.1 billion) jumped to 22% of total revenue.

Under Armour's international sales grew 46% last year. And they're projected to climb another 25% in 2018. Put simply, Under Armour isn't just an American brand anymore.

The company's results so far this year certainly seem to confirm Mike's thesis...

International sales are up 23% through the first three quarters, led by particularly strong growth in Asia and Europe. As Mike concluded back in April...

This brand is built to last. With a renewed focus on innovation, Under Armour's future is as bright as it has ever been. The fact that [CEO Kevin] Plank developed one of the world's most recognizable brands in roughly two decades is simply astounding.

But as we've shown today, he's just getting started... The bond market isn't worried about the short-term headwinds. While the stock market focuses on the company's slowing growth, let's invest alongside Plank as he positions Under Armour for long-term success.

Congratulations to Stansberry's Credit Opportunities readers who followed Mike's advice... They're sitting on gains of 42% in a little more than six months.

New 52-week highs (as of 10/30/18): none.

Clearly, at least some of our readers are following our advice. How is your portfolio holding up? Let us know at feedback@stansberryresearch.com.

"I'm surprised to see there are subscribers who have large losses and are hitting lots of stops. I've been patting myself on the back for the way my 15 Stansberry holdings have performed. I sold portions of 2 holdings to take profits and one of those subsequently hit its stop (for a profit, not a loss). I guess maybe it depends on the choice of subscriptions." – Paid-up subscriber Ken P.

"Not worrying... only selling because of [trailing] stops." – Paid-up subscriber D.H.

"I read [Tuesday's] Digest and am not surprised by the letters that were sent. My wife and I often discuss the importance of following directions especially with our investments! I have been with Stansberry for going on 8 years and an Alliance partner for almost 3 years.

"How am I doing? Well, over the 8 years my portfolio has skyrocketed almost 300%! Where are we this year? We're currently right at even after today's market jump. Talking with my siblings who utilize other "professionals", I'm up about 15% versus their performance this year.

"I stick to my stops, asset allocation and risk tolerance. That doesn't mean that I don't get a little nervous when we see market drops but a quick review of my portfolio standings as well as my TradeStops metrics quickly puts me back at ease. A wrong way driver on the freeway will eventually come to a tragic end... I choose to drive as I was instructed!" – Paid-up Stansberry Alliance member Al B.

"Great advice as always... My trading plan (monthly review of price vs. 10 month moving average, to oversimplify a bit) has me out of most of my positions today. And probably at the wrong time. But that's the plan dammit, and every time I thought I was smarter than the plan I got burned. So I'm mostly flat, and probably back in at the end of next month. 'Cause that's what the plan says." – Paid-up subscriber Billy T.

"I read your mailbag today and I'm also stopping out of positions. What I'm not stopping out of is the 30% of my portfolio in the bond recommendations and my gold. Yes, I'm down 6% and it hurts, but being down 12%-15% hurts much more. I'm fine hanging on until all the stops are gone. That means I still have my cash. Better to have cash than not to have cash! Nice work guys. The money spent on Credit Opportunities I was worried about spending. Now I understand!" – Paid-up subscriber Marty S.

"My wife and I have two brokerage accounts, both with IRA's. Our larger one is down about 9% from its peak, the smaller (and more aggressive with a few China stocks we didn't sell) one is down about 13%. We've closed a few positions and reallocated some money to stocks we feel will rise faster than the closed positions, and still have cash to buy more if the market drops more. A number of hedges are up which helps. We're long-term investors, and are sleeping fine at night. Thanks Porter and Steve for the long-term view." – Paid-up subscriber Scott P.

"Thanks for opening the Digest today with comments on managing risk with the melt up portfolio. I love the advice in each of the subscriptions I have, but I'd never do anything I was uncomfortable with and I hope other investors are as wise. I'm young and more risk tolerant so I'm actually putting about 20% of my portfolio into the melt up, but I've got 10% in precious metals and 20% in the Investment Advisory stocks, with another 30% in bonds from Credit Opportunities and Golden Triangle stocks before rounding it out with cash. I'm also using TradeStops to know WHEN to buy into melt up stocks, I'm still holding off on some of the red state stocks, not to mention I always follow my VQ and SSI stops.

"Keep up the great work, I more than paid for the True Wealth Systems subscription I purchased after Steve's melt up event with my profits from credit ops and investment advisory (in addition to covering my initial costs of course!) and I'm sure my returns the next 24 months will be even better than the 18% YTD I have now. Thanks." – Paid-up subscriber Cory S.

Regards,

Justin Brill
Baltimore, Maryland
October 31, 2018