What to Expect From the Stock Market Now

A 'Hail Mary' for Sears... Apple is not alone... Another warning from a global bellwether... What to expect from the stock market now...

Longtime Digest readers know we've been warning about the 'death of retail' for several years now...

And there may be no better posterchild for this trend than Sears Holdings, whose shares have shed more than 90% of their value since 2015.

When we last checked in on the troubled department-store owner in October, the company was on the verge of filing for bankruptcy protection.

Since then, Chairman Eddie Lampert and his hedge fund, ESL Investments, have been battling with creditors to buy what was left of the company out of bankruptcy and stave off liquidation of its remaining stores.

But as of this morning, it appeared that Lampert's efforts had failed and that the long saga was finally nearing an end. As news service Reuters reported...

Sears Holdings will ask a bankruptcy judge on Tuesday if it can proceed with liquidation after it could not reach an agreement on Chairman Edward Lampert's $4.4 billion takeover bid, people familiar with the matter said, potentially spelling the end for the 126-year-old U.S. department store chain...

Sears, which filed for bankruptcy protection last October, may have to close some 500 stores it is still operating in a liquidation, potentially putting up to 68,000 people out of work, the sources said. Its vast inventories of tools, appliances and store fixtures will be sold in fire sales, the sources added.

That report was apparently premature, however...

Just hours later, we learned Lampert had been granted one last chance to save the company. As financial-news network CNBC reported...

Sears on Tuesday had planned to tell the bankruptcy court it had rejected Lampert's $4.4 billion offer to buy the retailer, after it fell short of covering its bankruptcy expenses. Lampert, though, protested the decision, highlighting the extensive costs of Sears' bankruptcy advisors, a person familiar with the situation told CNBC.

Ultimately, a bankruptcy judge is giving Lampert more time... ESL Investments will now be required to pay a $120 million deposit by 4:00 p.m. Wednesday. Sears will then hold an auction Jan. 14, when it will compare Lampert's offer against others by liquidators.

We aren't holding our breath... But whether or not Lampert ultimately maintains control, there's little reason to believe he'll be any more successful at reviving the dying retailer than he has been to date.

Last week, Apple (AAPL) warned that sales of its flagship iPhone were slowing significantly..

At the time, we noted that this problem may have more do with falling demand for the iPhone itself than with any larger concerns in the global economy.

However, today we learned that Apple is not alone. From a Wall Street Journal report this morning...

Samsung Electronics expects its fourth-quarter operating profit will decline 29% – surprise guidance that fell far below analysts' estimates – in the latest sign of challenges hitting the tech industry.

The world's largest maker of smartphones and semiconductors said its estimated profit decline comes "amid mounting macro uncertainties." The Suwon, South Korea-based company pointed to "lackluster demand" for memory chips and "intensifying competition" in its handsets business.

Samsung is a bellwether for the global tech industry, producing devices like smartphones and televisions, while also supplying components for the world's largest electronics companies.

In short, between Apple and Samsung, the world's eight- and ninth-largest public companies by revenue have now warned that sales are slowing dramatically this month. And these warnings follow a similar announcement from global shipping giant FedEx in December.

It's still early...

But we'd be foolish to dismiss these warnings as merely isolated problems. They may be the first signs that the global economy is beginning to tip into recession. We'll be watching the coming earnings season closely for further confirmation.

In the meantime, regular readers know we've already been cautious on the broad U.S. stock market over the past several months. While we can't yet know if the 10-year bull market is over, we have repeatedly told you that the recent correction likely has further to run.

Our colleagues Ben Morris and Drew McConnell have also been cautious...

Last month, they highlighted a couple of key "support" levels that they believed would provide clues to the market's next moves.

In short, if the S&P 500 could hold above 2,580 and turn higher, it would be a good sign that the worst of the correction was over. On the other hand, if this level failed, it would be a sign that a bigger decline could be in store.

Unfortunately, the S&P 500 closed solidly below this level soon after, which brought the second level into play. As they shared in the December 19 Digest...

When an asset touches a trend line three times, it creates a strong support level for that asset. And in the chart below, you can see that a long-term trendline in the S&P 500 goes all the way back to March 2009.

This support level is about 21% below the September peak, at 2,320...

After breaking below 2,580 last month, the S&P plunged to 2,351 in just five days.

All told, stocks fell a swift 19.8% from their September peak. But importantly, the S&P has remained above this key level so far.

This is a positive sign...

However, as Ben and Drew explained to their DailyWealth Trader readers this morning, it's still too early to give the "all clear." And they're once again watching these important levels for clues that the worst may finally be over...

We looked at the 2,580 level last month. And we're returning to it today. Right now, though, the S&P 500 is approaching 2,580 from below...

In the chart below, you can see that 2,580 is now a major resistance level for stocks. Yesterday, the S&P 500 closed 1.2% below that level at 2,550...

Here's what to expect...

If the S&P 500 can climb and hold above 2,580, the worst of this pullback is likely behind us. Stocks could run back to their previous highs... and possibly on to new all-time highs...

If stocks stall at or below 2,580, it's more likely that we're in a "snapback" rally... and that another move lower is coming. A likely target would be the old December 24 low, at 2,351, which is now 7.8% lower from here.

Today, the S&P 500 closed at 2,574...

This is just shy of the key level they mentioned above, so we shouldn't have to wait long for confirmation either way.

But as they noted, even if stocks do turn lower from here, bulls still have reason for hope. Believe it or not, the recent price action looks remarkably similar to the start of the last "Melt Up" 20 years ago. More from Ben and Drew...

In the chart below, you can see the big pullback in the S&P 500 before the "tech bubble" boom in 1998. Back then, stocks broke below a big support level and fell a total of 19.3%. Then they bounced 11.4% and failed to break through the new resistance level.

After falling back to their previous lows, the S&P 500 bottomed. Then they soared 59% to their ultimate March 2000 peak...

And here again, they believe we won't have to wait long to find out if that's the case...

If we see stocks fall back to, but not drop much more than 1% below their recent lows, this sort of final mania phase could play out. And in DWT, we'll be ready.

Everyone is asking themselves now whether or not the bull market is over. And although it may not be satisfying, the best answer is, "It's still too soon to tell."

So stick to your trading plans on your current positions. And plan in advance for possible future setups. That way, you'll be ready to profit no matter where the market goes from here.

New 52-week highs (as of 1/7/19): none.

In today's mailbag: Kudos for Dave Lashmet... more feedback on the "pendulum of investor psychology"... and a reader is confused about gold. What's on your mind? Let us know at feedback@stansberryresearch.com.

"A tip of the hat to Dave Lashmet on LOXO. I bought it when he first recommended it. When it doubled, I sold about 40% of my stock, getting about 90% of my original money back. Let the balance grow until I got another 45% gain and sold. Bought back a few weeks ago when the market dipped and LOXO looked good again. Sold again [Monday] morning for a 63%. Tell Dave 'Thank you.'" – Paid-up Stansberry Alliance member K.M.K.

"Another tale of changing markets and investor psychology... As a young stock broker back in the mid to late '70's, we had a really nice older investor that came in the office every day to watch the tape (people actually did that back then). Pretty smart guy. Liked UAL (United Airlines) a lot and took a good sized position in 6 month call options with a $20 strike price. Fifty call options to be exact. Stock around 18 at the time. He's smart/lucky and the stock is off and running. By the time the calls were set to expire, they had more than doubled with stock around $45/share.

"That's when he decides he no longer a trader; now he's a long term investor. Why quit when things are so great. He reasons, I can exercise the calls since I'm over 50% equity and just continue the ride with just some interest carry on the margin debt. I don't have to tell you what happened next. I think it had to do with the Arab oil embargo, which because of his recent success at knowing what the market is going to do, decided it was a short term phenomenon that would correct itself. UAL starts south, and he eventually gets margined called out of the entire position for a net loss. After having a $125,000 gain.

"I had a Finance professor in college that wrote an entire text book on psychology and the investor. His thesis was that it is the single most important aspect of investing." – Paid-up subscriber Tom T.

"Gold prices rose during the last recession? That was a period of deflation and gold, being a store of value, declined as deflation took hold. Likewise, gold miners took a substantial hit, commensurate with the S&P 500. Why do you say that gold rose in value?" – Paid-up subscriber Jeff J.

Brill comment: That's simple, Jeff... Because it did. The last recession officially began in December 2007 and ended in June 2009. Gold rose from roughly $800 to more than $975 per ounce over that time, a gain of more than 20%.

Regards,

Justin Brill
Baltimore, Maryland
January 8, 2019

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