Watch for the Reversals

Dear subscriber,

There's an old adage in investing that says, "The market will go in the direction that causes the most pain to the most people."

In other words, if everyone is expecting the market to crash, it'll rise. If everyone is expecting the market to continue higher, it'll turn its back on investors and reverse course.

Either way, the crowd finds itself wrongly positioned in what seemed like an obvious bet. Then, everything starts to unravel... and the losses start stacking up.

It's why they call it the "pain trade."

Folks, I know I usually spend these pages looking at what has happened in the market over the past week or so.

But today, I'm going to take a slightly longer view... because last month was a big month for reversals.

All the accepted "obvious" trades in August – the ones that had been winning steadily for months or even years – fell apart.

We'll look at some simple ratio charts below to see this, using common exchange-traded funds ("ETFs") that you can look up on your own.

When you see the line in a chart rising, it means the asset listed first is outperforming the other. When you see the line falling, it means the second asset is outperforming.

First up, we have U.S. stocks compared with the rest of the global market...

As you can see below, for a few decades now, U.S. stocks have dominated their foreign counterparts. That trend took a major reversal in April with President Donald Trump's tariffs.

Then, U.S. stocks bounced back a bit as trade negotiations took place and the market proved resilient. But August, too, marks another, smaller reversal where U.S. stocks are once again falling behind the rest of the world...

Next, we have the ratio between large-cap and small-cap stocks.

As huge tech stocks have dominated the market in recent years, small caps have gotten clobbered. Our experts have watched this trend with bated breath. Today, small caps look out of favor and deliciously cheap... but the turning point simply hasn't come.

It's not the end of the megacaps' bull run yet. But August shows small caps finally gaining some ground...

In the same vein, investors have loved growth stocks and ignored value plays. Instead of searching for quality companies trading for cheap... they're focused on companies set to boom.

For much of this year, growth has outperformed value. But that changed in August...

Looking at the S&P 500 sectors, the best performer (unsurprisingly) has been tech. Meanwhile, health care has gotten pummeled by industry uncertainty and regulations.

But this trend also reversed in August...

It made huge sense, based on recent history, to go into August owning large caps... growth stocks... tech stocks... and U.S. stocks in general. Yet those exact investments saw notable reversals.

The market can surprise you when you least expect it.

In fact, it's built precisely to surprise you... and all other investors trying to divine the future.

That's why we at Stansberry Research focus on buying high-quality businesses with deep moats, strong cash flows, indelible brands, and stellar balance sheets.

Because we may not know whether tech or health care will outperform this month... or when investors will turn away from growth and toward value.

But we do know that, given time, the best businesses will reward investors as they gather more and more customers and increase their profits.

It takes a little patience and some analysis – but it works.

Of course, we also focus on minimizing risk. When you understand that markets can and will turn on you, you start to see the wisdom of diversification.

Tech stocks are great – and you should own plenty of them. But many individual investors own only tech stocks. And that's going to hurt them if we hit a market like we saw in 2001... or 2008... or 2022.

That said, analyzing hundreds of businesses and building a mathematically robust portfolio is an immense challenge for individual investors... especially those who don't have the time or money, let alone a portfolio manager or research staff to help them.

That's why, over the past two years, in a multimillion-dollar project, we've been building something better... something that puts the power back in your hands.

We're calling it our New Engine of Wealth (N.E.W.) System.

We started with our proprietary fundamental research engine, the Stansberry Score. This takes metrics like free cash flow, capital efficiency, earnings quality, and valuation... and builds them into a single measure to help investors find the best businesses in the market.

Then, we went a step further... We gave it an AI brain.

We fed it a massive dataset of historical stock-price movements, company fundamentals, correlations, and market volatility. We asked it to simulate hundreds of thousands of different portfolio combinations. And then we taught it how to build the best one.

What it produced wasn't a list of stock tips... It was a living, breathing portfolio strategy – a system designed to adapt to changes in the market, balance risk, and find opportunities that even seasoned analysts might miss.

And here's the best part...

In our historical testing, the results weren't just good. They were game-changing.

• It beat the market by a wide margin through three separate crashes – including the COVID-19 crash – and the inflation spike.

• It outperformed gold, real estate, and the traditional 60/40 portfolio.

• It even surpassed the returns of Warren Buffett's Berkshire Hathaway with far less volatility.

If you're an active investor, you need to watch the market for the kinds of reversals we saw in August. They're tough to predict. But they can destroy (or build) your wealth.

Our N.E.W. System can help you do just that. It'll help you invest smarter, better, and with state-of-the-art AI tools so that you can build the perfect portfolio designed to make money and reduce risk.

As we go to press, no one in the general public has access to this information just yet...

But This Week on Wall Street subscribers can hear the story of just how our New Engine of Wealth was built – and how it can work for you – with exclusive "early access" right here.

What Our Experts Are Reading and Sharing... 

• Three months ago, I told you that gold could reach $5,000 per ounce. It seemed like a wild prediction. Now, the metal has soared from $3,000 an ounce to $3,600 an ounce. Even boring old Goldman Sachs (GS) says that gold at $5,000 could happen... if the Federal Reserve loses its independence.
• Watch out for Chinese stock scams. Overseas stock scammers are using WhatsApp chat groups to run pump-and-dump schemes where they recommend Chinese stocks – listed on U.S. exchanges – that soon become worthless. Edwin Dorsey's The Bear Cave has a helpful walkthrough of how it works (with screenshots) so you know what to look out for.
• The Trump administration blew up a Venezuelan boat it claimed was trafficking drugs. This is well outside the norms for military strikes. And it makes the U.S. look a lot like the fallen Roman Empire. Seems like a stretch? Let our friend Bill Bonner explain the similarities with his typical sweeping view of history.

New Research in The Stansberry Investor Suite...

If you're a Stansberry Investor Suite subscriber, you already have access to The N.E.W. System. And you can read your first issue right here – where editor Whitney Tilson unveils his AI-generated 20-stock portfolio.

Remember, starting in October, monthly issues of The N.E.W. System will be published on the second Friday of each month.

Moving on, we have another set of brand-new research for you... based on another model our Stansberry analysts use to find great investments.

As Whitney explains in this month's Stansberry's Investment Advisory issue, this proprietary model scores every publicly traded company in one of our favorite industries... property and casualty (P&C) insurance.

This system is highly selective... but powerful.

It has led the Investment Advisory team to recommend 16 P&C stocks since 2012. And collectively, these stocks have delivered an average return of 26.9% per year, crushing the returns of their industry benchmark and the S&P 500 over the same periods.

And today, Whitney is sharing a new way the team will use its model to recommend winning investments... starting by adding the No. 1 ranked stock to the Investment Advisory model portfolio.

If history is any guide (and it is), this could be one of the most rewarding buy-and-hold investments you ever make.

Stansberry Investor Suite subscribers can read the full report here.

If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.

Until next week,

Matt Weinschenk
Director of Research

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