We just received an important signal for the stock market…
A little more than a year ago, Stansberry Research founder Porter Stansberry issued his first major correction warning in nearly seven years. As he wrote in the August 4, 2017 Digest…
How much longer can this [bull market] go on? No one knows. But for the first time since 2010, we’re now hitting levels on our complacency indicator that suggest a market correction is imminent…
As he explained at the time, this indicator – which he and the Stansberry’s Investment Advisory team developed back in 2014 – is a composite of several different gauges of market fear. And it has proven to be an incredibly powerful and accurate indicator of stock market corrections and bear markets. More from that Digest…
By studying these numbers from across dozens of different market cycles, we’ve discovered a key threshold level. When fear drops below this level, a correction (defined as a drop of more than 10%) or a bear market (a drop of more than 20%) has followed every single time, within 12 months.
This indicator hasn’t warned about every correction. (It correctly warned about seven of the last 10.) But it hasn’t produced any “false positives,” either. In other words, while it doesn’t spot every correction before it arrives, when it has told us that a correction is coming, the correction always does. (To be perfectly accurate, one of the resulting corrections only saw a decline of 8.4%. All of the others were in excess of 10%.)
You can see the key threshold level in the chart above. Drops in measures of fear below this level (30) always indicate a correction or bear market within 12 months. We don’t know if the warning signal we’re getting now means that the “big one” is imminent, or if we are only going to see a “small” correction. But we know something is coming. We know it’s coming soon. And we know that there are huge excesses in the credit markets, in particular.
Of course, as we now know, the indicator would be proven right again…
It triggered in early August… and less than six months later – in late January/early February – the market plunged more than 10% as volatility exploded higher.
Why do we bring this up now?
Because this week, the indicator officially issued a new correction warning for just the ninth time in the past 25 years. As Investment Advisory senior analyst Brett Aitken explained in a note to subscribers…
We received one more warning this morning that the end of our long bull market may be in sight… One of our key proprietary indicators just flashed a major warning signal that a correction could come within the next 12 months.
As Brett reminded readers, the key number for this indicator is 30. Below it, investors as a group are too complacent, and the risk of a correction is high. And as of this week, we’re now back below this critical level…
We back tested 25 years of data and found that when the score dropped below 30, it signaled a market correction of 10% or more over the following 12 months…
This month, the indicator dropped to 23. And it moves our primary indicator from “Neutral” to “Bearish.”
While we consider this our primary sentiment indicator for the market as a whole, we can’t know exactly when the correction will arrive. [But] based on almost 30 years of history, it will be in the next 12 months.
So what should you do with this information?
First, remember that this is not an immediate timing indicator. You don’t need to panic and sell your stocks today. In addition, as Brett noted, the signal could actually be a bullish sign for the near term. More from the update…
This complacency indicator could also signal the beginning of the final “Melt Up” phase of this long bull market. For the final, big move in long bull markets, investors must become extremely complacent and begin to believe the market will never correct again. That level of extremely bullish sentiment could be developing right now.
In other words, this indicator suggests we’re nearly certain to see at least a 10%-plus correction in the next 12 months… But it also suggests we could see a huge, “blow off” top before that correction finally arrives.
So like us, Brett and the Investment Advisory team continue to recommend staying long stocks, while being sure to properly manage your downside risk…
We want to participate in future gains the market has to offer. So we will continue to recommend buying stocks with compelling growth stories… And we will recommend hedging your portfolio with crisis hedges, and with short positions when opportunities arise…
But now is the time to take a close look at the steps you have taken to manage your risk. In the Stansberry’s Investment Advisory model portfolio, we will watch our stops.
Also, correct position sizing is critical… If any positions in your portfolio are keeping you up at night, then you may have too much exposure to that particular stock or sector. You may want to reduce the size of those positions (or close them entirely). As always, we recommend position sizes that allow you to sleep without worrying about individual stock holdings.
Meanwhile, today marks the 10-year anniversary of the collapse of Lehman Brothers…
The investment bank’s midnight bankruptcy filing on Monday, September 15, 2008 marked the start of the most severe phase of the worst financial crisis since the Great Depression.
Those of us who were close to the markets at that time will likely never forget the days and weeks that followed. It literally felt as though the world might end.
A decade later, effects of the crisis still linger…
While the broad markets and economy have long since recovered their losses, many folks have not. Countless investors have missed out on the recovery altogether, still too fearful to get back into the markets… while an entire generation of young people – who watched their parents lose fortunes in stocks and housing – has largely sworn off investing altogether.
To add insult to injury, despite dozens of books and untold media reports on the subject, it’s still not clear that we actually learned anything from it.
Sure, most folks know that it was the busting of the housing bubble – fueled by risky subprime mortgages and Wall Street “securitization” – that triggered the crisis.
But there is still little mainstream recognition that it was foolish government regulations, along with the Federal Reserve’s “easy money” policies, that were responsible for these excesses in the first place.
Instead, the crisis was used to justify even more government interference in the markets. And the Fed is celebrated for “saving” the financial system from disaster, even as its policies continue to feed new excesses that will inevitably lead to the next one.
C’est la vie.
Regards,
Justin Brill
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Source: Daily Wealth