Why the 'Melt Up' Could Resume Sooner Than You Think

Two more Stansberry editors turn bullish on gold... A closer look at last week's historic extreme... A perfect bullish record... Why the 'Melt Up' could resume sooner than you think...

In yesterday's Digest, we noted that two Stansberry Research editors recently turned bullish on gold again...

Last week, Dr. David "Doc" Eifrig told his Retirement Millionaire subscribers that now is an ideal time to buy some extra "disaster insurance," and increased his recommended portfolio allocation to gold for the first time in several years.

Meanwhile, in last month's issue of True Wealth, Steve Sjuggerud told his subscribers it was the best time to buy gold since 2001... and recommended getting back into gold and gold stocks for the first time since 2016.

Again, this is a big deal... Our editors and analysts are completely independent, and often have different perspectives and approaches to investing.

Naturally, this means they don't always agree about particular recommendations. But it also means that when they do, we take notice.

This week, we can officially add two more gold bulls to the list...

In Monday's issue of DailyWealth Trader, our colleagues Ben Morris and Drew McConnell became the latest to recommend gold.

As longtime readers may recall, this service is dedicated primarily to short- and intermediate-term trades. And Ben and Drew often use common-sense technical analysis – or "chart reading" – to help identify low-risk entry and exit points.

Like Steve and Doc, they noted the bullish fundamental outlook for gold, as well as the incredibly bearish sentiment among speculators today. However, they also pointed to a bullish technical picture as well. From the issue...

Last week, gold jumped to a two-month high of $1,225 per ounce. And as you can see in the long-term chart below, it bounced off its long-term trendline – an important "support level"...

As they noted, this is an undeniably positive sign for gold...

Even better, the drop leading up to that bounce pushed sentiment to new multiyear lows.

Traders became even more bearish than they were at gold's 2016 bottom, even though prices remained well above that low. This is a contrarian, bullish signal.

In addition, they noted that a reliable momentum indicator is also signaling that a bottom is likely in...

One of the best indicators of overbought and oversold conditions is the bullish percent index, or "BPI." The BPI tracks the percentage of stocks in a sector that are trading in a bullish pattern. It ranges from zero to 100.

The BPI flashes a "buy" signal when it drops to 30 or lower (oversold territory) and then turns higher. And it flashes a "sell" signal when it reaches 80 or higher (overbought territory) and then turns lower.

In the chart below, you can see that the gold miners BPI recently dropped below 20. And starting late last month, it turned higher...

With all these pieces in place, it's time to get back into gold stocks...

But this isn't the only big call Ben and Drew have made this week...

Last Friday, we showed you that the broad U.S. stock market had become incredibly "oversold" during the recent sell-off. Based on the rare extremes in several market indicators – including the relative strength index ("RSI") – we noted that a market bottom was probably near, and that stocks were likely to stage a sharp rebound in the weeks and months ahead.

Ben and Drew agreed. But after digging further into the data, they became even more bullish. Why? In short, according to history, stocks are almost certain to move higher over the next several months. As they explained in Tuesday's DailyWealth Trader...

Last week's drop was ugly... On Wednesday and Thursday, the benchmark S&P 500 Index fell 5.3%. It was one of the 46 biggest two-day declines in 50 years (20 of which happened between September 2008 and March 2009).

The move was sudden, too... This combination of suddenness and severity created a rare extreme in the market. And while it scares lots of traders and investors, you'll likely be surprised by what tends to happen next.

In short, this is not the time to sell stocks.

First, they took a look at the RSI...

And like us, they noted that it recently fell to a historic extreme...

An RSI reading above 70 means an asset is overbought and may be due to slow down or pull back. And an RSI below 30 means the asset is oversold and may be due to stabilize or rally.

But as you can see in the chart below, on Thursday the S&P 500's RSI fell to 17.6...

Again, RSI readings this low for the S&P 500 are rare...

In fact, over the past 30 years, we've only seen this indicator drop below 20 six times. And according to their research, every single one of them was a good buying opportunity...

The S&P 500 climbed in each instance, over every time frame we looked at from two weeks to three months.

In the following table, you can see the S&P 500's returns starting on the day it dropped below 20. Note that there wasn't a single negative return.

The "All Periods" row shows the index's average returns for the given time frame, regardless of the RSI, over the past 30 years. By comparing, we can see that the returns after the RSI dropped below 20 were dramatically better.

To be clear, these extremes didn't necessarily mark the exact low...

But Ben and Drew's research found they were still remarkably useful buy signals...

During the dot-com bust in 2001, the RSI dropped below 14. And if you had bought an S&P 500 index fund on the day the RSI fell below 20, you would have been down 6.5% just three days later.

But that was the largest drawdown for any period across all six occurrences. And by the two-week mark, the S&P 500 had bounced all the way back and gained 1.8%.

In other words, even though they didn't always mark the absolute bottom, buying after these rare extremes has been a great idea in the past. And they've certainly been a terrible time to sell.

This latest extreme also suggests that the "Melt Up" could resume sooner than you might believe possible...

If the S&P 500 simply returns its average after one of these extremes, it will close at 2,960 on January 11... a new all-time high.

If you're in the process of selling your stocks, you probably want to rethink your actions. History says now is a good time to be bullish, not bearish...

In sum, it's never easy to buy stocks after a large, sudden drop. The losses bring back memories from crises in the past. But history shows that buying stocks is exactly what you want to do.

Of course, having the courage to hang on to stocks while others panic is only part of the battle...

If you want to safely maximize your returns during the final "inning" of this long bull market, you also need to know which stocks are likely to do the best... how to properly allocate your portfolio to manage your risk... and perhaps most important, how to know when it's finally time to get out before the ensuing "Melt Down" begins.

This is why Steve is hosting his special Melt Up event on Wednesday, October 24. He'll share the biggest prediction of his career in front of a studio audience. You'll hear from some of the biggest names in finance, including Jim Rogers, David Tice, and Whitney Tilson. And Steve will share the name and ticker of a company whose stock could rise 1,000% over the next 12 months – completely free, just for attending.

Make sure to save your seat before it's too late. Click here to register.

New 52-week highs (as of 10/16/18): none.

A quiet day in the mailbag. Are you bearish or bullish on stocks right now? Let us know at feedback@stansberryresearch.com.

Regards,

Justin Brill Baltimore, Maryland October 17, 2018