Why We're Not Giving Up on the 'Melt Up' Yet

Groundhog Day for stocks… The wild swings continue… Why we're not giving up on the 'Melt Up' yet... But we are prepared for a bigger correction... Is it 1998 all over again?

It's beginning to feel a little like 'Groundhog Day' for stocks...

After rallying nearly 2% this morning, the broad U.S. markets rolled over and plunged again this afternoon before closing well off the lows of the day. When it was all said and done, the tech-heavy Nasdaq led the decline with a loss of 1.6%, followed by the Dow's 1.0% loss and the S&P 500's 0.7% loss.

Days like today certainly don't feel great. And they feel that much worse after the relative calm we've experienced over most of the past couple years.

However, it's important to remember that despite these wild swings, what we've seen over the past few weeks really isn't all that unusual. The S&P has fallen just shy of 10% as of today's close... Yet, we've already seen the market fall by 10%-20% on several occasions since this nine-and-a-half-year bull market began.

In other words, the broad market could easily fall another 10% from here and still be well within the confines of a "normal" bull market correction.

But regular Digest readers know this isn't the only reason to remain cautiously bullish today...

Over the past few weeks, we've shared plenty of data from Steve Sjuggerud, Dr. David "Doc" Eifrig, and other Stansberry Research editors that continue to support Steve's bullish "Melt Up" thesis.

Today, we'll share more, courtesy of our colleagues Ben Morris and Drew McConnell, editors of DailyWealth Trader. In Friday's issue, Ben and Drew highlighted a similarity between the last Melt Up – during the dot-com boom in the late 1990s – and today's market action. As they explained...

DWT readers are familiar with the 200-day moving average (200-DMA) and the 50-day moving average (50-DMA).

The 200-DMA works by collecting an asset's closing prices from the past 200 trading days (about 10 months), then taking the average of those prices. This produces a chart line that "smoothes out" volatility and gives us a good measure of the market's long-term trend.

The 50-DMA works in the same way. But because it averages just 50 days of trading – a little more than two months – we use it as the medium-term trend.

In the chart below, you can see that the S&P 500 fell below its 50-DMA during each of the pullbacks in the last Melt Up. But it held above its 200-DMA most of the time, except in 1998 and 1999 (the blue arrows).

You can also see that its dip below the 200-DMA in 1998 was the first time in about two years. And that the 50- and 200-DMA were stretched further apart than in 1999...

As they noted, the market suffered several corrections during the last Melt Up...

However, only two of those corrections were severe enough to push the S&P 500 below both its 50- and 200-DMAs. The biggest was in 1998, when stocks fell 19.2%. The decline in 1999 was the second-largest drop, at 12.1%.

Ben and Drew then compared these two previous corrections with the most recent market pullback this month. More from the issue...

In the chart below, you can see that the S&P 500 is now holding below its moving averages for the first time since 2016. But its 50-DMA is still trading well above its 200-DMA...

In short, they noted that the recent pullback resembles 1998 more than 1999 so far...

This doesn't necessarily mean stocks will fall 19% from their recent highs like they did back then, but it does suggest we should be prepared for further downside in the near term.

Fortunately, they believe the market could provide a major clue if a more serious decline is in the works. As they explained...

In the chart below, you can see that the S&P 500's next major "support" level is near 2,580...

In February and April, stocks stopped falling and turned higher from this level. It's major support. Here's what to look for...

If stocks can hold above 2,580 and turn higher, that will be a good sign that we've seen the worst of this pullback. Stocks could run back to their previous highs. And possibly on to new all-time highs.

If stocks fall and hold below 2,580, we need to be more cautious. Volatility will likely jump in that environment. And it could be a sign that we're in for a bigger decline like in 1998.

Even after today's decline, stocks remain more than 2% above this level. There's no guarantee we "test" this level at all.

However, if stocks fall further in the days ahead and eventually close below this important support, the likelihood of a continued correction will rise.

But again, history is clear... even a decline of this size would not mean the Melt Up is over yet.

Stay long, but stay smart... and keep a close eye on your trailing stops, just in case.

New 52-week highs (as of 10/26/18): none.

Several readers weigh in on the recent volatility. How are you holding up? Let us know at feedback@stansberryresearch.com.

"'Has the recent volatility caused you to panic and sell, or have you followed our advice? Let us know how you're faring during the market's choppiness by sending an e-mail.' Well, I've hit my trailing stops on several positions. Most of those have been VQ trailing stops as per TradeStops.

"Selling the stopped out stocks has given me enough cash to buy Steve's new Melt Up portfolio and Doc's latest from Retirement Trader. More of the stopped out stocks have been winners than losers. I'm happy to exit a position as a winner. And that gives me the confidence I need to follow my stops even when it results in a loss.

"I'm not panicking, I'm just following my predetermined plan. I would not have been able to do all that, I wouldn't even have had a plan, without the wonderful education and superb research you've given me with my Alliance Lifetime membership since 2013. Blessings on you all." – Paid-up subscriber Ed M.

"No panic. I'm just following my trailing stops. The only holdings I have left are ones that are sitting right on my trailing stop level. Not a situation I ever anticipated... interesting, but not fearsome." – Paid-up subscriber Pete K.

"I have raised cash awaiting an opportunity to buy. I have short positions, precious metals, and a strong position in cash. So... [Friday] morning I bought half of my Melt Up portfolio." – Paid-up subscriber James R.

"After the recent 5.4% pullback in my [IRA], I have discovered a highly functioning amygdala. It brought back memories from neuroanatomy class, as well as a tip from my golf pro to take deep slow breaths over those big Nassau putts on the 18th hole. Thanks for your good work." – Paid-up subscriber K.M.K.

"I do get somewhat worried with the high volatility in the stock market these days. But I am following Stansberry's advice of staying long on stocks and closely monitoring my trailing stop loss positions." – Paid-up subscriber Keith S.

"How I'm fairing in the recent correction... My IRA is down ~10% and 4 or 5 of my 20 positions hit their VQ trailing stops and were sold. That gives me cash to buy into Steve's melt up portfolio." – Paid-up subscriber Eric S.

"Re: Fear factor— I no longer go crazy either. It feels a bit uncomfortable to see declines but I have been expecting a correction for over a year. So if you anticipate it, its kind of like having a colonoscopy. No matter how much you dread it, you usually make it out to be worse than it seems when it occurs. So that's how I cope. I got hit really hard in 2008 but that was because I was a new investor that had invested everything in the tech sector. Well that taught me my first lesson. Diversify. In 2015-16 my coping was if I thought a particular stock was really good still with fundamentals but it seemed like it was tanking, I sold HALF my shares. That made my center of fear calm down and I still was not losing out on the stock . True, I paid a small brokerage fee for selling and buying back or buying some other stock that was not as vulnerable but this plan still worked for me and still does.

"Last week I sold half of one stock but not because of the fear factor. I looked at it and it had been sort of flat for awhile and I figured even though i still considered it a decent stock in the 500 I put the money that I got from the sale into another stock that was rising. Some day i may buy back some of the stock that I sold if it starts to gain again. The old saying that what goes up, must come down usually is true in reverse as well in the stock market. It just takes a bit of patience. Of course if this is going to be your sole means of survival when you retire, or for paying your bills right now, then you have to be more cautious and the fear factor I am sure is driving you crazy." – Paid-up subscriber Sharon W.

"Good presentation by Steve, as always. Anytime he makes a recommendation that he feels strongly about and it causes me consternation, then when I follow it, I almost always make good money. I saw the market was supposed to open down 300 points or so [Friday] morning, then the GDP pared the opening a bit. Mr. Market is always happy to greet 'fresh meat,' and after acting like it could be an up day, dropped 500 points or so. Yes, consternation was definitely present... a great time to at least test the waters. I bought 1/2 positions in 1/2 of the Melt up stocks. I think they all ended flat to higher from where I bought them. Hoping this will be a great ride, but will be following strict stops. Thank you, Stansberry. Thank you, Steve." – Paid-up subscriber Mitchell F.

Regards,

Justin Brill
Baltimore, Maryland
October 29, 2018