Two Reasons Why 'Market X' Will Keep Rallying in 2020

This market crushed the U.S. in 2019, yet hardly anyone noticed... Two reasons why 'Market X' will keep rallying in 2020... Not the sentiment you expect during a major bull run... Trading at a 50%-plus discount to U.S. stocks... Most folks won't give this investment a chance... A 'one click' way to put your money to work...

As my colleague Dan Ferris noted in Monday's Digest, U.S. stocks broke plenty of records in 2019...

The benchmark S&P 500 Index soared to new all-time highs. When you factor in reinvested dividends, the index finished the calendar year up more than 30% for only the second time in 20 years.

Once again, it was one of the best-performing markets around the globe... The U.S. outperformed Europe, Japan, China, and Brazil, just to name a few.

I (Chris Igou) expect the U.S. could have another incredible year in 2020. And I encourage you to be on board with that trend. This historic bull market keeps on chugging.

But that's not why I'm writing to you today...

Despite hitting so many record highs throughout the year, the U.S. market didn't take the top spot in 2019. It wasn't the world's biggest winner... And it wasn't close.

In fact, one overlooked market crushed the U.S. last year. It was the second-best performer last year, trailing only Greece, which was up 50%. Let's call it "Market X" for now.

Market X returned 41% during 2019 – an impressive return for a broad market.

Usually an incredible move like that is enough to catch investors' attention. But the thing is, as I'll explain in today's Digest, that's not what happened last year.

Don't beat yourself up if you were one of the investors who missed the rally, though. It's OK... History says there's plenty of upside opportunity left in this market even after the massive rally. As you'll see, Market X still presents an incredible opportunity right now based on two major tailwinds...

First, investors hate the idea of owning Market X even after its major rally...

That's great news for us as contrarians.

Market X's rally didn't just go unnoticed in 2019... Investors wanted nothing to do with it. They sold into the market's uptrend along the way.

We can see this through shares outstanding for one of Market X's major funds...

As regular Digest readers know, looking at shares outstanding gives us a reading on investor sentiment. It reveals when investors love or hate a particular stock... or group of stocks – like Market X.

You see, certain funds can create or liquidate shares based on demand. If investors want to buy into the fund, it can create new shares to meet demand. In that case, the share count will rise.

On the other hand, if investors aren't interested, the fund will liquidate shares as demand disappears. That's the exact case we saw in Market X in 2019. Check it out...

Shares outstanding for Market X fell 27% in 2019. That's a major drop... And it's not what you would expect to see during a bull run in the market.

It wasn't just last year that saw a major drop in shares outstanding in Market X. Investors have been fleeing this market for years...

The total share count for this fund has fallen 61% since it peaked in 2017. Investors are completely giving up on Market X.

Now, this kind of hated extreme often comes after poor performance. You'd expect to see this type of behavior during a major market crash as investors panic and get out in fear of more losses.

But as I said, that's not the case with Market X... Investors were getting out during a significant rally higher. It's one of the most hated rallies in the world today.

It's not just shares outstanding that tell this story...

Exchange-traded funds ('ETFs') in Market X are seeing outflows as well...

The longer you follow the markets, the more one thing becomes clear... Paying attention to what investors say is less useful than what they're actually doing with their money.

As regular readers know, humans often run off their emotions. We may say one thing today, and then feel differently about it tomorrow. That's why following investor money is a much better sign of market sentiment...

According to Bloomberg, ETFs that hold U.S. stocks saw the largest inflows among other countries over the past year. The total amount of inflows in that span sits at around $324 billion.

That's what you would expect during a major bull run. Investors are excited about the rally, and they're getting on board. They don't want to miss out on all the gains.

But when you look at Market X's ETFs, the story is much different...

Nearly $650 million flowed out of Market X over the past year. That's insane! It's another sign that investors aren't buying into the rally. And it shows just how hated Market X is today.

Fortunately for us, this market is also a great value right now...

Market X currently trades at a discount of around 50% or more to U.S. stocks.

OK, you probably don't believe me. I wouldn't have believed it either if I didn't see it with my own eyes.

Market X is dirt-cheap compared with U.S. stocks just about any way you slice it.

One way to see this is through the price-to-earnings (P/E) ratio for Market X. It's a quick way to make sure you're not overpaying for a stock or ETF before buying it.

The lower the P/E ratio, the cheaper the stock.

Today, Market X trades at a P/E ratio of 10.7. For reference, the S&P 500 trades at a P/E ratio of 21.7 right now. Said another way, Market X trades at a 51% discount to the U.S.

And again, it's not just one valuation measure that shows this...

Market X is also dirt-cheap compared with the U.S. based on the price-to-book (P/B) ratio and the price-to-sales (P/S) ratio as well. Take a look at the table below...

Market X trades at a 50%-plus discount to U.S. stocks based on these measures. That's an incredible value!

Looking at the P/B ratio, Market X trades for an impressive 56% discount. And it gets even better when looking at the P/S ratio... which shows a discount of 60% right now.

Opportunities like this don't come around often...

Investors hate the idea of owning Market X today, even though it was one of the best-performing markets in the world in 2019. You have an opportunity to buy into Market X at 50%-plus discounts to the U.S. market on a variety of metrics. And it remains in a strong uptrend... Again, it's up more than 40% since the beginning of 2019.

Before I reveal Market X's identity, I know most of you won't even give it a chance...

Heck, you wouldn't be alone. As we've seen in this essay, investors around the globe are giving up on this market... They have been for years.

But I'm writing to ask you to avoid following the herd...

It's an incredible setup in a market that soared in 2019. And thanks to what we're still seeing today as far as sentiment and value, big gains are likely in 2020 as well.

Market X – the market I've been talking about today – is Russia.

Now, I know what you're thinking... "Not a chance!"

I hear you... But if you want to be a successful contrarian investor, you must be willing to invest in opportunities like this. You can't let your bias toward Russia block what history is telling you.

Today's setup in Russia is one that can lead to big gains...

Like I said above, Russia was the second-best performer of 2019, behind Greece. It remains extremely hated today. It trades for a 50%-plus discount to U.S. stocks. And as I mentioned, it's in a strong uptrend... It has gained more than 40% since the start of 2019.

That's exactly what we want to see in an investment. Even more, I expect we could soon see investors pile back into Russian stocks in 2020...

Fear of missing out on future gains will cause these investors to jump back in. And it will be another tailwind for today's rally.

If you haven't stopped reading already, there's a simple "one click" way for you to own a basket of Russian stocks right now...

The VanEck Vectors Russia Fund (RSX) holds a broad basket of Russian stocks. The goal of the fund is to track the broader Russian market. So RSX holds 96% of its assets in Russian stocks.

And best of all, it trades right here in the U.S... So you don't have to worry about buying on a foreign exchange. Your broker should have no problem buying it for you.

It may not be the market you're most comfortable with buying. You might have a strong opinion against Russia. But history says it's a fantastic setup... And RSX is an easy way to make the trade.

New 52-week highs (as of 1/7/20): AllianceBernstein (AB), DB Gold Double Long ETN (DGP), New Oriental Education & Technology (EDU), Equinox Gold (EQX), Facebook (FB), Franco-Nevada (FNV), SPDR Gold Shares (GLD), Huntington Ingalls (HII), JD.com (JD), KraneShares CSI China Internet Fund (KWEB), Leagold Mining (LMCNF), Lockheed Martin (LMT), Nordic American Tankers (NAT), NovaGold Resources (NG), New Pacific Metals (NUPMF), Nuveen Municipal Value Fund (NUV), Nvidia (NVDA), Sea Limited (SE), TAL Education (TAL), Torex Gold Resources (TORXF), and The Trade Desk (TTD).

In today's mailbag: An economist shares his thoughts on Dan Ferris' critique of his profession in Monday's Digest, while two other subscribers discuss the situation in Iran. As always, you can tell us what's on your mind at feedback@stansberryresearch.com.

"In Dan's words: 'Economists are academics who spend their lives publishing overspecialized, pseudo-scientific gibberish and flaunting their ignorance of the inscrutable complexity of trillion-dollar economies served by deep, liquid markets.' All I can say is that he's spot on.

"I am almost embarrassed to admit being an economist, because the profession is obsessed with technical esoterica while the world is plunging into economic darkness. Economists fiddle while America stumbles along a path of tragic economic ignorance.

"Keep telling it like it is!" – Paid-up subscriber Mark H.

"I would just like to echo what Kim [Iskyan] said [in Tuesday's Digest]. In 2011 I completed a 4 year assignment in Qatar and decided to drive back to our home in Spain with my wife. We went via UAE, by boat across to Iran and then north to cross into Turkey.

"Everyone was so friendly and helpful. That includes the military at checkpoints who would ask us where we were from, where we were going and how did we like their country.

"The only problem came with documentation for our vehicle when we tried to cross into Turkey but it was eventually sorted after a few hours of discussion. As it happens that probably did us a favor as, when we got to our hotel on Lake Van, an earthquake had just reduced it from a building with 6 floors to just a pile of rubble.

"As a result of this trip to Iran, as Brits, we now cannot apply for an on-line visa to visit the U.S. We would have to apply through an embassy so we now avoid travel to the USA because of the hassle." – Paid-up subscriber Alan D.

"I lived in Iran 1971-74 and then again 1975-78. Still have Iranian friends (in U.S.). I am very concerned about the current situation." – Paid-up subscriber Don M.

Good investing,

Chris Igou
Jacksonville, Florida
January 8, 2020