Why the S&P 500 Could Surge Higher This Year

 
A new chart unexpectedly grabbed my attention recently… one that could have huge implications for the future of the U.S. stock market.
 
For the past month, I've been predicting a correction in the S&P 500 is right around the corner. But there's another side to the story…
 
If this correction happens the way I expect, it may trigger a key pattern in the stock market. This kind of setup doesn't happen often. But when it does, stocks have tended to see powerful rallies going forward… and this year, it could happen again.
 
Let's get right to it…
 
For the most part, the U.S. dollar and the S&P 500 move in opposite directions.
 
Stocks trading on the S&P 500 are priced in U.S. dollars, just like gold and oil. When the dollar is increasing in value, it takes fewer U.S. dollars to buy these assets… so their prices tend to fall.
 
Below is a comparison chart of the S&P 500 and the U.S. Dollar Index for the past 30 years. The gray highlighted areas show the times when the dollar and the S&P 500 were moving in opposite directions from one another.
 
There are also times when the S&P 500 and the U.S. dollar both move up together. These are usually times of economic recovery… when everything is going right for the United States. When all cylinders are firing in the U.S. economy, it has no peers. At such times, the world wants our dollars and our assets. The chart below highlights these times over the past 30 years…
 
As these first two charts show, both situations are fairly common. We have frequently seen stocks moving opposite the dollar. And it's just as typical to see both of them moving up together.
 
What's extremely uncommon, however, is to see both the S&P 500 and the U.S. dollar moving down together. That has only happened a handful of times over the last 30 years… as shown in the gray highlighted areas of the chart below.
 
These are usually periods of sharp uncertainty in the U.S. economy. In 2011, for example, we experienced a year of slow growth and fears of a double-dip recession. In 2005, economic growth weakened unexpectedly, and consumer spending abruptly slowed.
 
But what's striking about the periods when the S&P and the dollar moved down together is that those downtrends haven't lasted long… and the stock market moved significantly higher shortly thereafter.
 
As I said earlier, the U.S. economy usually doesn't disappoint for long. Periods of heightened economic uncertainty often resolve in upside surprises for the stock market as everyone figures out that the sky isn't really falling.
 
Why does all this matter today? Because I've been telling you for the past month that I expect both the U.S. dollar and the S&P 500 to start downward corrections in the near future. And that means we could be in for a surprising rally later this year…
 
One of the biggest signs is our "smart money" sentiment indicator – the commitments of commercial traders.
 
We can see what commercial hedgers are expecting in the market by looking at the Commitment of Traders ("COT") reports. And right now, the COT report is signaling headwinds ahead. The smart-money market players have been hedging their bets on the current rally most of this year, and they continue to do so today.
 
The COT report also shows that commercial traders are holding large bearish positions on the dollar, while open interest is increasing. The same pattern occurred in 2014, and again in early 2015… And each time, significant falls in the dollar followed.
 
Commercial hedgers can be wrong for months at a time (they have a lot more staying power than the rest of us). But eventually, they tend to be proven right.
 
If we do see both the dollar and the S&P 500 correct over the next few months, I'll be eagerly awaiting the start of a new rally in the S&P 500. It could be a very powerful one.
 
Regards,
 
Richard Smith
 
Editor's note: Richard and his team recently developed an exciting new system that helps investors lower their risk – and potentially double their returns – without needing to buy or sell any new stocks. Read all about it here.

Source: DailyWealth

Shocking Underperformance Leads to a New Stealth Bull Market

 
A "stealth" bull market is now underway in Europe – and your potential upside is far greater than you can imagine.
 
Since the end of 2008, U.S. stocks are up roughly 150%… But European stocks have been completely left behind.
 
You might ask, "If that's the case, then why should we care about owning European stocks today? Why shouldn't we just buy U.S. stocks and forget about Europe?"
 
It's because the situation today is so extreme…
 
We've never seen European stocks left so far behind the U.S. And based on history, this extreme underperformance sets us up for significant upside.
 
Let me explain…
 
To set the stage, take a look at just how dramatically Europe has underperformed the U.S.:
 
This underperformance is even more shocking when you realize that U.S. and European stocks basically tracked each other for the preceding 20 years:
 
But does this matter? Is there a path to profit from this? Yes… because after extremes much smaller than this one, history shows that huge gains have followed.
 
Take a look…
 
This next chart shows the rolling eight-year performance difference between U.S. and European stocks.
 
Here's how it works: If U.S. stocks return 100% over eight years and European stocks return 50%, the chart would show a 50% reading… And U.S. stocks would have outperformed by 50 percentage points in that case.
 
History shows that a 50 percentage-point difference is a typical extreme. But today, U.S. stocks are outperforming by roughly 150 percentage points…
 
We're in uncharted territory today. The outperformance in U.S. stocks has never been anywhere near this large. But history's less-extreme examples point to big gains ahead in European stocks.
 
For example, the last time the U.S. outperformed by nearly 50 percentage points over eight years was in 2002. What happened next? A massive multi-year bull market in European stocks…
 
If you'd waited for the uptrend before buying, then you would have bought European stocks in mid-2003. By late 2007, you would have made 172% gains. U.S. stocks returned just 74% over the same period.
 
A similar opportunity appeared in late 1998… That time, European stocks jumped 64% in 18 months.
 
Today's opportunity is more extreme than either of those cases. Europe is starting from a lower base, so your upside could be greater.
 
European stocks don't have to soar for this extreme to go away. Europe just needs to outperform the U.S.
 
That could happen one of two ways… 1) if Europe soars higher, or 2) if Europe simply falls less than the U.S. falls.
 
We don't want to buy European stocks solely because they've underperformed. When you dig a bit deeper, you realize that Europe offers exactly what I want to see in a trade… European stocks are 1) cheap, 2) hated, and 3) in the start of an uptrend.
 
With the setup we have today, we could potentially see a mid-2000s type of bull market – when European stocks soared 172% in just a few years.
 
Europe is not on most people's radar – and that's just the way I like it. Don't wait… Consider taking a position in European stocks today.
 
Good investing,
 
Steve
 

Source: DailyWealth

How to Make Your Most Important Wealth Decision in Minutes

 
Please don't let this story happen to you…
 
My friend's father, who is now more than 60 years old and retired, was a successful banker in his professional life. He earned a great salary and accumulated large amounts of stock in the two major U.S. banks where he worked for years.
 
This stock constituted the bulk of his retirement savings. He expected it to appreciate in value and provide him with a growing nest egg. He was so confident, he kept more than 80% of his savings in just these two stocks. Then, 2008 came…
 
One of the banks my friend's father owned was Lehman Brothers. This firm went bankrupt from bad mortgage bets. Shares went to zero in just months.
 
The other bank didn't go bankrupt, but its shares declined more than 50% during the credit crisis. (It has since been acquired by a larger bank.)
 
As you can imagine, this former banker's retirement is now a world away from where it was in 2008. More than half of what he expected to live on for the rest of his life vanished.
 
It vanished because of one tiny error in what's called "asset allocation."
 
Asset allocation can seem boring and complex (though it doesn't need to be). And teaching you the right way to do it doesn't make Wall Street any money… That's why you don't hear much about it.
 
But it's the most important factor in your retirement-investing success…
 
Simply put: Asset allocation is how you balance your wealth among stocks, bonds, cash, real estate, commodities, and other investments in your portfolio.
 
Keeping your wealth stored in a good, diversified mix of assets is the key to avoiding catastrophic losses.
 
If you keep too much wealth – like 80% of it – in a few stocks and the stock market goes south, you'll suffer badly. If you're heavy in real estate (like many folks were in 2006), you'll be wiped out in a big real estate crash (like many folks were in 2008).
 
The same goes for any asset… gold, oil, bonds, land, blue-chip stocks, etc.
 
You can get an entire degree learning how to "optimize" these in your portfolio… trying to nail the perfect risk/return ratio. Heck, folks have studied the stuff in-depth and done the math behind asset allocation and portfolio theories and won the Nobel Prize for their work.
 
But much of the "optimization" the geeks come up with is based on forecasts and past data that are wrong more often than they are right. You can get ahead of 90% of investors with a much simpler process.
 
First, you start with allocating a little pile of money into an emergency fund… You should keep it liquid as cash in a savings or checking account. It makes sense to put aside enough to last you between three and six months, depending on your personal need for safety.
 
Once you set aside some cash for emergencies… start with a simple allocation where you decide between just stocks and fixed-income types of securities (bonds). If you have a longer-term view and a higher tolerance for risk, you could make your allocation 80% stocks and 20% bonds. If you are closer to retirement and don't like volatile returns, you could do the inverse, 80% bonds and 20% stocks. Most of us fall somewhere in between. Personally, I'm about 50% stocks and 40% fixed income.
 
The point is to select assets – like stocks and bonds – that are not perfectly correlated, meaning their price movements aren't tied to each other. Combining them in your portfolio will smooth out your overall returns.
 
You can easily get more complex, dividing your categories (or "allocations") into domestic and international stocks, and corporate, government, and municipal bonds, and so on. You can even add a small allocation to precious metals, or what I call "chaos hedges."
 
But before you get into all that, start simple.
 
You can choose, say, a 60% stock and 40% bond allocation, and stick to it. A 60% stock and 40% bond allocation is a great "middle of the fairway" asset-allocation plan. It ensures you harness the proven wealth-building power of stocks… while also using the conservative, income-producing power of bonds.
 
Each year, with just a few hours of work, you should rebalance your portfolio. Be sure to do it every 366 days to make sure you don't incur a tax bill on short-term gains.
 
As you get closer to retirement, you can adjust it to match your risk tolerance. For example, you can use the "60/40" asset allocation while you are in your 40s, 50s, and 60s… and then start increasing your allocation to more bonds and fixed-income types of investments when you reach your 70s.
 
The goal of this essay is not to load you down with mathematical formulas or stocks you should go out and buy. I'm trying to help you develop a way of thinking that will make you a successful investor.
 
So today, start thinking about your overall portfolio. Asset allocation… it's the only way to build wealth long term and sleep well at night at the same time.
 
Here's to our health, wealth, and a great retirement,
 
Dr. David Eifrig
 
Editor's note: Proper asset allocation is a huge factor in your success as an investor. If you're interested in learning more about how to grow your wealth with a balanced portfolio, check out Dave's Retirement Millionaire service. His research is designed to help you save money and sleep well at night, no matter what happens in the markets or the economy. Click here to learn more.

Source: DailyWealth