What you need to know about the selloff... Remember your stops... Why the selling could be overdone... A 'violent rally' could be starting... What to do if you're still worried...
We reviewed our thoughts on the market selloff in yesterday's Digest...
In short, while we believe this could be the start of a larger stock market decline, it's too soon to be sure. As Porter noted in the August issue of Stansberry's Investment Advisory...
You should know that even though we believe the actions of the Fed have caused some of the problems provoking the current economic climate, we're not expecting a full-blown, calamitous, 2008-like event in the stock market. We do, however, believe that a temporary period of deflation is upon us. And we do believe this will cause serious headwinds in the markets over the coming months.
We're more than six years into the current bull market. We've been cautious with our investments by recommending what we believe are high-quality stocks, and companies that form part of a bigger trend. We want to own these stocks for the long haul...
The deflationary risks in the economy are real and significant. And our research leads us to believe that we'll see a serious correction in the market. But nobody knows the future. We don't hold a crystal ball. So we have to consider that our timing could be off. That means we want to remain long with our highest-conviction ideas to participate in a continued bull market.
Again, while we recommend selling risky or overpriced assets today, we're not selling stocks indiscriminately. As we explained yesterday, the reason is simple...
There have been many reasons to worry over the past six years. The ongoing Greek crisis... the 2010 "flash crash"... the 2011 Japanese nuclear disaster... the 2011 (and 2013) "debt ceiling" crisis... the 2013 "sequester"... or the 2014 Ebola outbreak, just to name a few.
But if you had used any of them as a reason to sell, you would have missed out on the continuing bull market.
Our advice remains the same: Stay long your "winners," selectively put new money to work in high-conviction opportunities, and consider selling some stocks short to "hedge" your portfolio... But just in case, keep your "catastrophe-prevention plan" in place.
Meanwhile, we now have several signs that the selling could be over, at least in the near term...
In today's DailyWealth, our colleague Steve Sjuggerud explained why there's a "great chance of a rally starting now"...
"Short-term selling exhaustion." That's how Jason Goepfert of SentimenTrader.com described the panic selling in the stock market yesterday morning.
Instead of panicking, Jason ran the numbers to find out what could happen from here...
He wanted to answer the question: What has happened in the past after we've seen mornings like yesterday morning?
As Steve said, the results may surprise you: stocks were up two weeks later in every single historical instance. And it wasn't a small average move. On average, stocks were up 5.4%. More from Steve...
To run his numbers, Jason specifically looked at every instance in which the stock index futures were trading 3% below their previous day's close.
Yesterday morning's gap down was big... Looking back to 1982, we've only seen gaps down this size or larger in 1987, 2001, and 2008.
You may be surprised to hear it, but a big gap down is actually a GOOD thing, as it is a better confirmation of short-term selling exhaustion. Jason says: "The larger the gap, the more it indicates panic, and the more likely we will see a rebound in prices as fear recedes over the next 2-3 sessions."
Steve also reminded readers of the importance of sticking to your trailing stops, no matter what happens next...
Whenever I see panic in the markets, I want to remove the emotions and look at the historical numbers... While I happen to agree with Jason, the reality is that neither of us can know what will happen – all we can do is present you with the weight of the evidence.
Since we can't know for sure what will happen, I strongly urge you to honor your trailing stops. In my True Wealth newsletter, we are close to our trailing stops in many positions.
If one of your stocks CLOSES below its stop price, then sell the next day. (We do NOT use intraday changes for our trailing stops, we use closing prices.) Following your trailing stops ensures that you limit your downside risk... This ensures that you live to fight another day.
Our colleague Jeff Clark also thinks we're due for a strong "bounce" over the next several days...
Regular readers know that Jeff is a trader. As editor of the Stansberry Short Report, he focuses mostly on short- to intermediate-term trading – trades lasting several days to several weeks – rather than longer-term investing.
In an update to his subscribers this morning, Jeff noted that several of the indicators he follows are now at "extreme oversold" levels that often lead to "violent" rallies.
Jeff agrees it's too soon to sound the alarm about further declines, but he says the next several days could offer some clues...
It's unlikely that the market will simply shrug off the past week's action and head toward new all-time highs. Rather, we're likely in for a period of consolidation that will repair some of the past week's damage.
The nature of the coming bounce will tell us a lot about the potential for the intermediate-term trend of the stock market. The bulls need to make a stand here and push the market higher over the next few days to keep the intermediate-term uptrend alive. At a minimum, the S&P 500 needs to get back above the 1,960 level. (It closed at 1,893 yesterday.)
Otherwise, the bears will have the momentum, and we'll likely see even lower stock prices over the next few months.
So far, the market appears to be following that script...
Stocks opened significantly higher today. All three major U.S. indexes were up more than 1.5% as of midday trading. The S&P 500 is trading near 1,920... just 2% from the levels Jeff mentioned above. And all three indexes have nearly recovered from yesterday's losses.
Still, if the flood of subscriber e-mails in our mailbag is any indication, many folks are still worried...
If you're one of them, there are two key things to keep in mind. As our colleagues Brian Hunt and Ben Morris explained to DailyWealth Trader subscribers yesterday...
1) Realize that if this selloff is keeping you up at night, you might have too much of your wealth allocated to the stock market.
We frequently provide guidance on intelligent asset allocation. This means holding a diversified mix of stocks, real estate, gold, speculations, cash, bonds, and private business investments. Staying diversified means a selloff in one asset won't cause a catastrophic loss for you.
2) Realize times of panic are often great times to buy valuable assets at good prices. In the past week, some quality businesses have suffered serious drops and/or fallen to new 52-week lows. The current market panic should make for great buying opportunities.
Finally, whether you're worried about the market right now or just looking for the best, safest places to invest new money going forward, we urge you to join us for Dr. David "Doc" Eifrig's free "emergency briefing" tomorrow night – Wednesday, August 26 – at 8 p.m. Eastern time.
Doc will share his latest thoughts on the markets with you LIVE online... including which investments could be most vulnerable to further declines and the safest places to invest today.
You'll also receive a free copy of Doc's brand-new research report, which details his three favorite income investments – with yields as high as 10% – right now. This report is yours to keep for simply attending the free webinar.
As we mentioned yesterday, there is absolutely no obligation for attending this free event. But if you'd like to participate, you must reserve a spot in advance. Click here to register.
New 52-week highs (as of 8/24/15): Short position in iShares MSCI Canada Index Fund (EWC), short position in Suncor Energy (SU), and short position in Viacom (VIAB).
In the mailbag, several subscribers weigh in on the recent market action. Send us your questions, comments, and criticisms to feedback@stansberryresearch.com.
"I would encourage subscriber David Sarricks, who wrote to you [yesterday], to subscribe to Jeff Clark's Short Report. It's a nice luxury to be able to look at his Direct Line on a morning like today's and get his expert insights in real time before the market opens. While the rest of the world is coming to an end, Jeff is explaining to his readers just what he is doing to make a profit via a scalp trade. Nice!" – Paid-up subscriber Timothy S.
"The recent market action is a good reminder to make use of the so-called 'stink bid' strategy. Put a good-till-cancelled order out there at some impossibly low limit for the stocks you want to own and on days like today when the market loses its mind, your order may execute. For example, this morning you could have bought Apple for $92, Microsoft for $40, Cisco for $23, McDonalds for $88... the list goes on. Go ahead and name your price with a limit order. You could end up owning these blue chip companies at or near their 52-week lows." – Paid-up subscriber L.B.
"Thanks guys, you recommended taking 10% of our portfolio out of the market several weeks ago to have some gunpowder ready for a market drop. I sold off 20%, so thanks. I couldn't believe my eyes when I checked the market at 8:31 CST this morning. It was down 483 and I opened my E-trade to start buying. By the time I got E-Trade open the market was down 1,086. I got 5 stocks bought at what I thought were fire sale price. Got all the gunpowder used up in less than 5 minutes. Any suggestions of what to do now before your proposed Wednesday evening discussions? Thanks." – Paid-up subscriber B.J.
Brill comment: As always, we aren't allowed to offer individual investment advice, but we might suggest enjoying your good fortune. As subscriber L.B. mentioned above, many high-quality stocks declined double digits when the market opened, before quickly recovering half or more of those losses. If you were able to scoop up some of them at "fire sale" prices, congratulations... You're likely already up as much as 10% in some of those names.
Again, we can't tell you what to do now, but you have several options. For example, if this is a new position, you could just set a standard 20% or 25% trailing stop and hold it like you would any other position. If you used the selloff to add to existing positions, you could continue to hold them with your current trailing stops, or adjust your stops based on your new cost basis (like you would with a dividend payment). Or if you're particularly risk-averse, you could set a "hard" stop at yesterday's lows, meaning you'd sell for a small loss if the stock closed below that level.
Regards,
Justin Brill
Baltimore, Maryland
August 25, 2015
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