How to Ride out a Correction Like a 'Market Stoic'

 
Socrates spent decades as a teacher – or, as he liked to describe himself, a "midwife to the soul."
 
But then, an Athenian jury sentenced him to death for his ideas. When his friends and followers in attendance began weeping, Socrates spoke…
 
"What is this strange outcry? … I have been told that a man should die in peace. Be quiet, then, and have patience."
 
Partly inspired by the story of Socrates' death, Zeno of Citium created the philosophy of Stoicism as a way of life. Its core principle: to find happiness, you must accept the present moment and the uncontrollable forces of nature… focus your efforts on things you can control… and not be consumed by desires.
 
In other words, you can't get through life without accepting the things you can't change during hard times.
 
Today, you need to be a "Market Stoic"…
 
With the market hitting new highs and valuations getting stretched, everyone wants to know how to dodge the big, looming crash. "When will it hit?" "How will I know when to get out?"
 
Unfortunately, no magic indicator can predict a crash. But don't worry. Even if the market corrects, we're likely not going to see a massive 40% fall – for one reason.
 
Let me explain…
 
You can't build your wealth in the market without accepting some volatility.
 
The market drops by 10% – the generally accepted measure of a "correction" – with surprising frequency. Even drops of 20% – "bear markets" – are common. It's going to happen.
 
Clearly, you want to avoid drops akin to the Great Depression, when the market collapsed 80% from its high and didn't reach a new one for almost 30 years… or the 2008-2009 financial crisis, when the market plummeted more than 50%.
 
But the 10% and 20% drops… they're just part of the game.
 
And believe me, if you've got, say, $500,000 in the market, watching $100,000 of your wealth evaporate feels devastating.
 
But it's not…
 
Most corrections are insignificant. If you set aside the major crises of the dot-com bust and the 2008-2009 financial crisis… over the last 12 corrections of 10% or greater, it has typically taken about five months to earn back losses. And sometimes the markets bounced back in as little as 32 days, like they did in 1997 or 1999.
 
But what about the true bear markets? Those big declines coincided with economic recessions.
 
Here's our tally of the past recessions along with the market pullbacks from peak to trough…
 
Recession Start
Recession End
Market Downturn
August 1929
March 1933
-86.0%
May 1937
June 1938
-54.0%
February 1945
October 1945
-29.6%
November 1948
October 1949
-20.6%
July 1953
May 1954
-14.8%
August 1957
April 1958
-20.7%
April 1960
February 1961
-13.9%
December 1969
November 1970
-36.1%
November 1973
March 1975
-48.2%
January 1980
November 1982
-27.1%*
July 1990
March 1991
-19.9%
March 2001
November 2001
-48.9%
December 2007
June 2009
-56.3%
Average
 
-36.6%
* Measures a single downturn from two twin recessions.
This picture looks grim. But it turns out, corrections just aren't as bad when they don't have a recession attached to them…
 
According to numbers compiled by Ben Carlson of Ritholtz Wealth Management, when the market drops without a recession, the average decline is only about 19.4%. And if you limit that to the modern era – 1970 onward – the average drops to 17.5%.
 
Just take a look at our tally of double-digit losses in the S&P 500 Index when we weren't in recession…
 
Time Frame
Market Downturn
1939-40
-31.9%
1941
-34.5%
1943
-13.1%
1947
-14.7%
1961-62
-26.4%
1966
-22.2%
1967-68
-10.1%
1971
-13.9%
1978
-13.6%
1983-84
-14.4%
1987
-33.5%
1998
-19.3%
2002
-14.7%
2010
-16.0%
2011
-19.4%
2015
-12.4%
The lesson here is simple… Ride out the recession-free declines in the markets like the bumps in the road that they are.
 
On that front, we need to check in on the economy… It's strong.
 
The latest quarter's real gross domestic product (GDP) growth checked in at 3.2%. Unemployment is low, only 4.1% last month. Job creation is strong… And industrial production is growing.
 
You can't, won't, and shouldn't try to time a 20% correction in the market with your retirement portfolio. It's going to happen. It's the price of playing the game.
 
And given the state of the economy, there's little reason to suspect a decline worse than that.
 
Eventually, whether it's in the next month or year or two, the market will turn on all of us. And we'll need to sit back and take it… with calmness.
 
That's not to say we do nothing. Like the Stoics, we're going to focus on the things we can change.
 
Follow a thoughtful asset-allocation plan… set reasonable goals… and limit your investing to quality businesses that compound capital over time.
 
Here's to our health, wealth, and a great retirement,
 
Dr. David Eifrig
 
Editor's note: If you've saved for retirement, Dave says you need to know about a unique provision of the latest tax-reform bill. Thanks to this change, investors could collect thousands of dollars over the coming weeks. And recently, he told his Retirement Millionaire readers how to get positioned for the biggest payouts… Click here to learn more.

Source: DailyWealth

Investors Are 'All In' – But Selling Could Be a Terrible Mistake

 
Individual investors were "all in." It felt like the top.
 
The problem was that it wasn't the top.
 
It was early 1998. Investors were betting on a continued uptrend – they had gone "all in" on stocks, based on one measure.
 
If you'd sold then simply because investors were "all in," you would have been kicking yourself later. That's because the market didn't peak until two years later – in early 2000.
 
Said another way, if you'd gotten out when investors first went "all in," you would have missed out on two years' worth of upside.
 
Today, we're seeing the same scenario. Investors are "all in" on stocks, just like they were in 1998. And just like that time, selling early could be a huge mistake.
 
Let me explain…
 
I always want to know what individual investors are doing with their money.
 
It tells us when investments are hated or loved… And how to act as contrarians.
 
Still, the timing around sentiment indicators can be tricky. That's the case with today's "all in" measure for stocks.
 
The American Association of Individual Investors (AAII) has been tracking investor portfolios for decades. One of its surveys covers the cash, stock, and bond allocations of individual investors.
 
According to the latest survey, individual investors' cash positions are at the lowest level we've seen in nearly two decades. Investors hold just 13% of their portfolios in cash right now.
 
Again, cash positions haven't been that low since the dot-com boom. But it doesn't mean stocks are peaking today. Here's how things went last time…
 
In January 1989, individual investors held 36% of their portfolios in cash. Stocks boomed over the next several years. And by March 1998, investors held only 11% of their portfolios in cash.
 
The dot-com boom was in full swing. And investors had gone "all in."
 
Sounds scary, right? Well, it wasn't.
 
From March 1998 to March 2000, the tech-heavy Nasdaq Composite Index gained 177%…
 
Getting out just as investors were piling in would have been a terrible mistake.
 
Today, we're in a similar position. Mom-and-pop investors' cash allocations are at 13%, according to AAII.
 
That tells us that sentiment is getting more positive. Investors are more excited to own stocks. But it doesn't mean a crash is imminent.
 
When cash positions hit similar lows in early 1998, the Nasdaq nearly tripled in less than two years.
 
Now, I'm not saying that stocks are certain to double or triple from here. But we have no reason to expect this is the top just because individuals have moved into the stock market, either.
 
History says the opposite is true… We could still have years of upside ahead of us – along with some of the biggest gains of this bull market.
 
Good investing,
 
Brett Eversole
 

Source: DailyWealth

Start Building Your Wealth Now With These Four Financial Habits

 
Everyone has bad habits… especially when it comes to money.
 
I've seen them in myself, my family, and my friends… and you probably have too.
 
Bad habits might not put you in the poorhouse, but they'll make your financial life a lot more challenging and uncertain than it needs to be.
 
So if you want to grow your money in the years to come, start practicing these four good financial habits instead…
 
1Form a healthy relationship with money.
Some people view money like a pint of Ben & Jerry's ice cream while they're on a diet… forbidden, gluttonous, but so nice – in a feel-bad-about-yourself-later kind of way.
 
They think that money is dirty. They think having even a little bit of it is bad. Or they think that liking money, or the things you can buy with it, means that you're selfish and greedy.
 
If this sounds like you, bad news: You're probably never going to be rich. If on some level you don't like money, you'll probably never have a lot of it. If you think money – and being rich – is "bad", it means that you don't really want it. That voice in your head is going to stand in your way.
 
If that's the way you feel, that's fine – as long as you realize that you'll never have much money.
 
But if you think you'd like money, the first step is to make sure that your brain isn't working against you. You need to stop and think about your real attitude. Then, either embrace it… or start with a clean slate that says, "money is good."
 
2Know that money isn't an end in itself.
The number in your bank or brokerage account should not define you.
 
A far smarter (and more productive) strategy is to re-orient your thinking so you view money as a means to an end.
 
What's that end? Options. If you have money, the range of opportunities available to you – what you can do with your time – expands dramatically.
 
Conversely, no money equals fewer options. If you're struggling to make ends meet, your menu of opportunities is limited because you're focused on making rent or the car payment tomorrow. You can't choose what to do, because your amount of money constrains you.
 
3Diversify your 'personal equity.'
The idea behind diversification is simple. If you keep all of your eggs in one basket, you're setting yourself up for big losses – and possible disaster. However, if you spread your risk across different types of assets, your other holdings will help balance out the losses.
 
But diversification goes beyond just holding a number of different assets… What about your "personal equity"? Is it diversified?
 
Here's what I mean… First, add up the value of everything you own, like stocks and stamp collections and your home. Then, subtract what you owe (on your mortgage, to the taxman, or to your ex-spouse, for example). What's left is your net worth, or your equity.
 
When I say "personal equity," I'm talking about a broader definition of your assets. It includes everything from financial, personal, and professional experience to your prospects and earnings power. Personal equity measures how you're going to build your equity in the future.
 
To diversify your personal equity, think about where you'll be earning your living and how you'll be adding to your savings in coming years. Where is your paycheck coming from? What other sources of income do you have? Where is your professional network – and how strong is it? How transferable are your skills? How many languages do you speak – and how easily could you work in a different country?
 
If you're not already diversified in these areas, start now.
 
4Invest in real estate.
As my colleague Peter Churchouse says… all human activity uses land.
 
The hotel that you stayed at on your last vacation uses land. So does the airport or train station you used to get there. In fact, any business needs land… from that tiny tech startup in the garage to the sprawling empires of multinationals.
 
Given how essential real estate is to everything, you'd think that its importance would be reflected in the average stock investment portfolio. But it's not. At around $2 trillion of total market capitalization, it is small potatoes when set against the energy sector, technology, consumer stocks, or banking stocks.
 
Don't make the mistake of not having any real estate in your portfolio. Remember, owning your house isn't the same thing as investing in real estate stocks… First, real estate stocks offer the potential for big gains. And second, they give you a simple way to diversify your assets.
 
These four habits will help make you money… And although many more exist, these are a great place to start. On their own, they might not make you rich. But they will make your life – and building lasting wealth – much easier in the years to come.
 
Good investing,
 
Kim Iskyan
 
Editor's note: Real estate can be one of the best investments you ever make… And despite what hundreds of "experts" say, you only need five simple techniques to get started. Kim's colleague Peter has captured opportunities all over the world using these little-known strategies… even turning one $10,000 investment into a $12.8 million fortune.
 
You can learn more about these five tips – and why you should invest in real estate today – by clicking here.

Source: DailyWealth

All Right, Mr. 'Melt Up'… So When Does It End?

 
In October 2015, I gave a speech in Las Vegas called "Welcome to the Melt Up."
 
"The great bull market in stocks that started in 2009 will ultimately end in a dot-com style Melt Up," I explained. Since then, I have hammered that theme home.
 
Nobody's cared – until lately.
 
Here in 2018, it seems, all the Wall Street experts are getting onboard with my "Melt Up" idea.
 
Investors are now asking me when it ends. Here's my take…
 
Long story short, we still have time. The ultimate market peak might not arrive until 2020. No kidding.
 
I like to give you simple explanations and simple answers, when I can. And I like to boil things down to one indicator for you to keep your eyes on, when I can.
 
It's a bit harder with this question, but it's still doable. Here's the answer:
 
Over the past 30 years, the Federal Reserve has caused the three major peaks in the stock market…
 
Specifically, the Fed artificially caused a situation called an "inverted yield curve." Once that happened, the market peaked more than 18 months later. Each time.
 
The reason is simple… You see, an inverted yield curve happens when short-term bonds yield more than long-term bonds. Normally, the reverse is true. Long-term lenders are taking on more risk, so long-term bonds tend to pay more in interest. When the opposite happens, it's a bad sign.
 
Investors will debate endlessly over the causes of the peaks… Valuation… debt… stupid politicians… But when you crunch the numbers, it turns out the inverted yield curve has predicted stock market peaks better than any of these things.
 
Take a look at the spread between the 10-year Treasury bond yield and the two-year Treasury bond yield. Going back to about 1985, each time the black line initially crossed below zero (causing an inverted yield curve), the stock market peaked more than 18 months later…
 
This is what happens when the Fed pushes short-term interest rates above long-term rates.
 
For more than a decade, we've been "in the clear" on this indicator. But last week, the interest rate on two-year Treasury bonds shot up above 2% for the first time since the financial crisis. That caused the line in this chart to accelerate toward zero.
 
Once it hits zero, the clock starts…
 
However, the last three times the line has hit zero, it took more than 18 months for the stock market to peak.
 
If it takes another six months for the line to cross below zero, and then about 18 months for the market to peak, that puts us into the year 2020.
 
While the stock market peak could be pushed out to 2020 based on this one simple indicator, it doesn't mean things aren't risky…
 
For me, as soon as that line hits zero, I'll start making some changes… tightening my trailing stops… and preparing for the end of the bull market.
 
People have been poking me in the chest lately, saying, "All right, Mr. Melt Up… what's it gonna be now?"
 
It's hard to boil down a lot of moving parts into one signal to watch. This one indicator is the best I've got to help you plan for the end of the Melt Up…
 
Good investing,
 
Steve
 

Source: DailyWealth

This Notoriously Cyclical Sector Is Starting to Boom

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 
 One "left for dead" asset class is quietly moving higher again…
 
Since bottoming in late June, the Bloomberg Commodity Index – which tracks nearly two dozen commodities across energy, grains, precious metals, industrial metals, and more – is up 11%.
 
And the index – considered the benchmark for the global commodities market – has picked up steam lately. About half of those gains occurred over just the past four weeks alone.
 
This rally shouldn't come as much of a surprise. After all, the relationship between stocks and commodities reached a historic extreme last year. Take a look…
 
Commodities have only been this cheap relative to stocks two other times in the past 50 years. And in both cases, commodities dramatically outperformed stocks over the next several years.
 
The first time was just before President Richard Nixon took the U.S. dollar off the gold standard in the early 1970s. As you may recall, inflation skyrocketed, and commodity prices surged to absurd new highs over the next several years.
 
The second time was just before the last "Melt Up" in stocks during the dot-com boom. What many folks don't realize is that many commodities actually bottomed more than a year before the stock market peaked. And again, they trounced the stock market for years.
 
 Remember, commodities are notoriously cyclical…
 
They go through massive booms and busts. As we often say… if you catch one of these big cycles at the wrong time, you'll lose a fortune. Catch one early, though, and you may never have to work again.
 
The recent broad-based rally in commodity prices suggests that we may be in the early stages of another multiyear boom. Our colleague Steve Sjuggerud agrees…
 
In fact, he has been calling for this for nearly two years. Back in March 2016, Steve told his True Wealth subscribers to buy the "Masters of the Universe" in commodities.
 
In that issue, Steve noted that a classic "bad to less bad" opportunity could be taking shape. At the time, the entire global mining sector was starting to move higher.
 
Major miners Rio Tinto (RIO) and BHP Billiton (BHP) were leading the way. As Steve put it (emphasis added)…
 
When the stock prices of the global mining giants get going, triple-digit gains aren't just possible… they're normal.
 
This could be the beginning of the next "up cycle" in global mining stocks – which have been good for hundreds-of-percent gains in the past
 
This is a fantastic "bad to less bad" opportunity. We don't need to see good news from the Masters of the Universe. They've been in terrible shape for years. And everyone knows it.
 
All we need to see is a slight shift in sentiment… for things to go from bad to less bad. And I think we have that, based on the recent price action.

His favorite "one click" way to benefit from the trend was the iShares MSCI Global Metals & Mining Producers Fund (PICK). Rio Tinto and BHP Billiton are among its top holdings, along with other Masters of the Universe like Freeport-McMoRan (FCX), whose massive Grasberg mine is one of the world's largest copper mines.
 
 You can likely guess what has happened since then…
 
Just as Steve predicted, PICK has continued its uptrend. As you can see from the following chart, these companies have quietly moved higher as things have gone from bad to less bad in the sector…
 
True Wealth subscribers who followed Steve's advice are sitting on 97% gains so far.
 
But like us, he believes a commodities boom could just be getting started… As a result, mining stocks appear to have plenty of room to run from here.
 
 Of course, that doesn't mean Steve is turning bearish on stocks just yet…
 
In fact, he believes the "Melt Up" could run for another year or even two before the market finally peaks. That's why Steve recently put together a presentation to help you maximize your gains during this once-in-a-lifetime event.
 
And for a limited time, you can get Steve's "Melt Up Blueprint" – and all of his research in True Wealth – at a 75% discount. Watch Steve's free presentation right here.
 
Regards,
 
Justin Brill
 
Editor's note: Stocks are marching to new all-time highs as the bull market enters its ninth year. We may never see another bull market like this again. That's why Steve has put together a "blueprint" to profiting from the Melt Up. In it, he shares the ideas and investments he believes will lead to the biggest gains as the market explodes higher. Learn more here.
 

Source: DailyWealth

Six Ways to Get Ready for the Next Crisis – Before It Strikes

Steve's note: Regular readers know I'm bullish on U.S. stocks. And based on history, I believe we could see an extreme "blast off" in the markets – a "Melt Up." But you should always stick to your stops… and plan for the unexpected. Today, my colleague Kim Iskyan shares a few tips on how to be ready for anything.
 
Also, the markets will be closed on Monday for Martin Luther King Jr. Day. Look for your next issue of DailyWealth on Tuesday after the Weekend Edition.
 
Global stock markets keep heading higher and higher… credit markets are increasingly overextended… and geopolitics are more harrowing than ever.
 
Meanwhile, the MSCI All Country World Index (which reflects the performance of global stock markets) was up around 24% in 2017.
 
That's great news… But sooner or later, "mean reversion" says the good times have to end.
 
Mean reversion is the idea that markets (along with pretty much anything else in life) tend to reverse extreme movements over time – and gravitate back to average. It's like a rubber band… Stretch it, and when you let go, it returns to its original shape.
 
I've been saying for a while that markets around the world are "stretched" and could snap back to their "original shape" at any moment.
 
That means now is the time to prepare for whatever might happen… whether it's a market correction, a currency collapse, or something far worse.
 
So here are six easy things you can do right now to prepare yourself for a crisis… whether it's next week or next year.
 
1Stash away some cash.
No matter what – unless things turn really ugly – cash will get you what you need if your debit or credit cards don't work. But money in the bank won't do you any good if the banks go bust, or if the ATMs stop working.
 
Keep enough cash in a home safe to get you by for a few weeks – or a few months, preferably.
 
Besides, given negative interest rates in much of the world, you might be better off earning zero interest under your own roof than negative interest with your bank.
 
2Keep some cash in U.S. dollars.
Despite the best efforts of the U.S. Federal Reserve, the U.S. dollar is still the default global currency. Almost anywhere in the developing world (and in much of the rest of it), a $20 bill can fix a lot of problems – and a Ben Franklin can fix the rest of them.
 
If you live outside the U.S. and your local currency is for some reason unavailable (like we've seen in many crises in emerging markets all around the world), or worthless (like we're seeing in Venezuela, today) – having greenbacks can be a lifesaver.
 
3Diversify where you bank.
Diversifying where you bank is just as important as diversifying your portfolio. Keep some money in a "too big to fail" bank, which is safe – until it's allowed to fail, of course. Also keep some money in a conservative local lender where they know you by name.
 
And remember: Just because your bank is covered by a national banking insurance entity doesn't mean you'll get any money when you need it. So you'd do well to have at least one account in a different country.
 
4Download now what you might need tomorrow.
Don't assume that personal data and records that are online today – starting with bank or brokerage statements, for example – will be there when you need them tomorrow.
 
Maybe it's a generational thing… but I trust the "cloud" to save my important stuff only if it's also saved on a hard drive tucked away somewhere. Important documents that are on someone else's website are available to you only as long as 1) that website is still up and running, and 2) the owner of the website gives you access to it.
 
So periodically download personal records… and store them someplace safe.
 
5Follow your stop loss levels.
If you own stocks, you need to have a stop loss in mind for every stock you own (the lowest price at which you're willing to sell to limit your losses if a stock falls). Just as important, if a stock you hold hits your stop loss, sell. You can't make money by investing if you don't have money to invest.
 
A stock that's down 50% has to double before you get back to breakeven. How often have you invested in a stock that's doubled? Probably not often enough to count on it. It's much better to have a stop loss level that's (say) 25% below where you bought the stock than to be out of the game. Or, even better, to use a trailing stop that follows the stock up as the share price rises.
 
6Own gold.
History has proven time and again that gold is one of the best ways to hedge your portfolio – that is, to protect it when stock markets everywhere fall. For one thing, gold and stocks are negatively correlated assets. They tend to move in opposite directions.
 
Second, people have used gold as a currency or medium of exchange for thousands of years. Meanwhile, other forms of money – livestock, shells, stones, and tulips – have come and gone.
 
Gold has withstood history and maintained its inherent value. It's durable, it's easy to transport, it looks the same everywhere, it's relatively easy to weigh and grade… It's the perfect store of value. In short, gold is insurance against financial calamity.
 
Even if you don't know what the next crisis is going to be, you can do your best to be ready for it. Get started with these six steps – today.
 
Good investing,
 
Kim Iskyan
 
Editor's note: Diversifying your portfolio is another key crisis-prevention tool… But if you're like most investors, you're probably leaving out one powerful asset. Kim's colleague Peter Churchouse believes it could be the No. 1 investment of the next decade – and with his five simple strategies, anyone can get in on the opportunity. Click here to learn more.

Source: DailyWealth

My Secret for Once-in-a-Lifetime Hires

 
How quickly do you know if someone is B.S.-ing you?
 
I once hired a young guy within 10 minutes of meeting him… because it only took me that long to realize he was the real deal.
 
I'd never seen him before. I'd never heard of him.
 
But I knew I wanted him on my team the first time I talked to him during a coffee break at an investment conference.
 
"How would you like to come work for me?" I asked him. "I'm not sure what you'll do yet…"
 
"I'll sweep the floors," he interrupted. I hired him on the spot.
 
I then had to somehow explain to my wife that someone we didn't know was moving in with us the next week… and that he was going to live in the room above the garage.
 
He packed up his life into his car, drove from his home in Iowa to Florida, and the rest is history…
 
People always ask me, "How did you know, Steve? What was it about him?"
 
You see, this young guy went on to become extremely successful in our business, behind the scenes…
 
He grew to know more than almost anyone about every aspect of our business, and he understood our customers as well as anyone ever has. Those skills turned him into a wealthy man as he approached 40.
 
We don't see each other much these days. He outgrew working for me pretty quickly, and I didn't want to hold him back.
 
But he's still on top of what's captivating our readers… Last month, he sent me a great headline from the original "fake news" site, The Onion: "Bitcoin Plunge Reveals Possible Vulnerabilities in Crazy Imaginary Internet Money."
 
I had to laugh at the story. He's still on top of it.
 
When he started out with me, he had no experience in the investment business. No kidding…
 
He never went to college. Instead, he read nonstop. And he traded his own money. He taught himself… And he taught himself well.
 
But I didn't know these things when I hired him. They didn't matter. I already knew he had everything he needed to succeed.
 
Here's how I could tell: He always asked the next question.
 
What I mean is that when we spoke, he quickly assessed all the possible answers, figured out the right one for himself, and then moved on to solving the next question.
 
He does that, all day, every day. That's the guy I want on my team. And that's how he's succeeded.
 
If someone is talking investing, I only need to hear a few sentences to know if that person REALLY knows his stuff – with complete mastery – or if he has no clue what he is talking about.
 
You know what I mean… If you really know a subject, then you know if someone is trying to B.S. you. One of the key "tells" for me is if they're not asking the next question.
 
It works the other way around, too…
 
Some of you know that I'm a fanatical guitar player… It's been surprising to me, but I've been fortunate to get to know some of the world's most innovative guitar guys – just like this young investment guy got to know me.
 
It only takes these guitar legends a couple minutes to see that I ask the next question… that I have run through all the possibilities, that I have landed on the right answer, and that we're solving the next question. Their guard comes down, and the relationship starts pretty easily.
 
I'm not very good at interviewing people for a job… I'm not sure what you get out of asking people if they're a hard worker or a team player.
 
Instead, I want to see how they react to questions and challenges. And when I find a man or woman asking the next question, they move to the top of the list.
 
So the next time you're wondering if someone is the right hire for you, ask yourself, "Do they ask the next question?"
 
If so, hire 'em! And if you're the one job hunting, start putting this idea to work…
 
Good investing,
 
Steve
 

Source: DailyWealth

Today's Record-High Optimism Doesn't Mean You Should Sell

 
Today, I'm going to blow your mind…
 
I will go against just about everything I've taught you in my decades of writing to you.
 
As regular DailyWealth readers know by now, I always say that if you really want to succeed as an investor, you must buy what's hated and sell what's loved.
 
This is absolutely correct – almost all of the time.
 
When stocks were hated in 2008 and 2009, I bought more than I ever have before. In 2011, when U.S. housing was more hated than ever, I loaded up.
 
If you are smart enough to wait for an asset to become hated… and then you can wait for the trend to turn "up" and confirm your idea… then you should end up as a super-successful investor.
 
You won't get it right every time, of course. But you will outperform just about everyone over time… I'm certain of it.
 
That part is not in question. That isn't the "blow your mind" part. That's just the "buy" side of the trade. Buy when an asset is hated and has started an uptrend. Simple.
 
But what about when an asset becomes overly loved?
 
Almost all of the time, the same rules apply. When investors become irrationally exuberant about an asset, we're getting close to time to sell.
 
But not always…
 
There are rare instances in the markets when exuberance gets extremely strong. But instead of causing a crash, it's actually an indicator of a market on the verge of breaking out much higher.
 
I haven't shared this idea with you in the past. I didn't want to confuse you.
 
But this is happening today. Even though exuberance is high, history shows it could actually lead to a "blast off" in the markets – a "Melt Up."
 
Let me give you two examples…
 
Bloomberg published an article this week titled, "Equity Euphoria Grips the Entire World." Essentially, the article said that global stocks are more "overbought" than at any time since it began tracking this data in 1988.
 
The obvious conclusion from this would be that stocks should pull back.
 
But don't be too hasty in drawing your conclusions…
 
Jason Goepfert of the excellent SentimenTrader website ran the numbers on previous overbought extremes like this. After doing his homework, his conclusions were surprising…
 
While a high reading in the [relative strength index] suggests an overbought condition, when it is extremely high it shows the kind of momentum that doesn't die easily.
I don't want to steal Jason's thunder. The simple conclusion is that global stocks performed somewhat poorly over the following couple weeks. But from a slightly longer-term viewpoint – three and six months later – global stocks were solidly higher.
 
It's not just stock momentum, either… Today, we're also seeing record-high optimism from the National Association of Active Investment Managers ("NAAIM") Exposure Index.
 
Each week, NAAIM surveys hedge-fund and mutual-fund managers to see how they feel about the market… and what percentage of their portfolios they have currently invested in stocks.
 
A rating of zero means these folks own no stocks. And a rating of 100 tells us that managers are fully invested.
 
The index hit a record level of 109 in late December. (Before that, this index had only broken above 100 five other times since 2006.) That means not only are investment managers fully invested… they're also buying with leverage. Take a look…
 
This tells us that investors are getting more bullish… And investment managers specifically are putting money to work in a big way right now.
 
You might think that based on what I've preached for decades, buying stocks when investment managers are overly optimistic is a bad idea.
 
It turns out, buying stocks when this index was above 100 would have led to double-digit gains in a year or less, on average. (The caveat here is that we have very little historical data.)
 
So… that's two examples of how profitable it can be to buy when we are at an extreme in optimism.
 
Most of the time, the old rules apply. Buy what's hated. Sell what's loved.
 
But on rare occasions… only when you see an extreme extreme (and I mean an extreme extreme)… we could actually be on the verge of higher highs in the stock market – a Melt Up, as I call it.
 
I hesitated to write this to you today. You see:
 
•  
100% of the time, I want you to buy what's hated and starting an uptrend.
 
•   99% of the time, I want you to sell what's loved and starting a downtrend.
Stocks are overly loved today to a degree we haven't seen in years. Because of that, they could see a couple bad weeks.
 
But that doesn't mean you should sell. History suggests this will simply be a "head fake"… and stocks will move higher over the next three to six months.
 
This could be that 1% of the time when the extreme extreme is a good thing. The head fake will scare a lot of people into selling. And then I expect us to enter the "blast off" stage of the Melt Up.
 
Don't take this as gospel, of course… I'm just spit-ballin' here, based on historical precedent. I can't be 100% certain that stocks will have a couple bad weeks or enter a blast off stage after that. But this is the script I'm working with.
 
Remember, almost all of the time, I tell you to buy what's hated and sell what's loved. But today, we're in an extreme situation… and history says the rules might be different with such an extreme. Let's hope so!
 
Good investing,
 
Steve
 

Source: DailyWealth

How to Profit With Trades That Don't 'Agree'

 
Trading is not like weaving a tapestry…
 
You don't start with a grand vision, then work diligently and single-mindedly to complete your design.
 
Instead, you start with a set of rules, which you can refine and change over time. Then, you place trades that meet your guidelines.
 
You don't know where the process will take you… But if you follow a strong set of rules, you'll typically make more money than you lose.
 
Along the way, you may find that you hold "contradictory" positions – positions which, if one goes up, the other almost certainly goes down.
 
Lots of folks have a hard time wrapping their heads around this idea. After all, why would you put your money into two ideas that go against each other? Isn't it more efficient to choose one side or the other?
 
Today, I'll show you when it makes sense to hold contradictory positions, and how to place these trades effectively…
 
Let's start by considering when it makes sense to place contradictory trades.
 
First, your trades may have different time frames…
 
For example, maybe you think that semiconductor giant Intel (INTC) is headed much higher… And you buy shares with the idea of holding them for at least a year.
 
But a couple of months later, Intel is up a lot – plus, you see signs that tech stocks have gone too far, too fast. So you sell short shares of a tech fund like the Technology Select Sector SPDR Fund (XLK) to profit as the sector pulls back. You only plan to hold this trade for a month or two.
 
Intel is a major holding in XLK. And the two often move in the same direction. So if your short XLK position does well, your long Intel position likely won't… for a stretch of time. On the surface, the two positions contradict.
 
You could sell Intel before shorting XLK to avoid that contradiction. But what if you're wrong? You could miss out on a lot more upside in what was supposed to be a long-term position in Intel.
 
Let's say XLK falls and Intel holds steady or rises. You may be able to book profits on the XLK short and make money with Intel at the same time. Sometimes two trades that seem to contradict can both work out.
 
The lesson: You don't want to close out of a long-term position so your portfolio "agrees" with a short-term trade.
 
In the Intel example, shorting XLK serves as a hedge. It reduces the risk to your overall portfolio. If both Intel and XLK drop, you at least make money on XLK. And once tech stocks have pulled back, you can get out of the XLK short and continue to hold Intel.
 
The best way to decide whether or not to place trades that "disagree" is by using your trade guidelines…
 
In DailyWealth Trader (DWT), one of our most important guidelines is to place trades with good reward-to-risk ratios. As long as two trades have good reward-to-risk ratios, we can place both of them individually… even if they don't agree.
 
Now, you probably won't set out to place contradictory trades… But you may be holding one position, then another that contradicts the first trade (and also meets your guidelines for a good trade) appears. And that's OK.
 
When you're wrong on a short-term trade, though, you want to be wrong quickly and only lose a little. That's why we often use tight stop losses for our shorter-term trades. This way, you improve your reward-to-risk ratio – and you won't let a short-term trade eat much into the profits of a longer-term trade.
 
Don't be fooled into thinking that your portfolio should represent a grand vision of the future, where everything in your portfolio will make you money as your vision plays out.
 
That's not how the real world works. And that idea opens you up to a lot of unnecessary risk.
 
Instead, figure out the trading rules that work best for you, and stick to them. Contradictory trades won't always work out perfectly. But over time, sticking with good trading rules will make you money.
 
Good trading,
 
Ben Morris
 
Editor's note: Today, Ben's trading rules are pointing to two sectors that are both riding huge, unstoppable tailwinds. These investments recently hit new all-time highs… But they can still go higher. To learn more about his DailyWealth Trader newsletter – and how to access these recommendations – click here.

Source: DailyWealth

The Stock Market 'Melt Up' Chorus Grows

 
"Welcome to the Melt Up."
 
That was the title of a speech I gave to hundreds of our best customers at our Las Vegas conference back in 2015.
 
My story was simple. Stocks were about to go higher than most investors could possibly imagine.
 
That conference was more than two years ago. I've been writing about the "Melt Up" almost nonstop since then.
 
In recent weeks, many famous Wall Street experts have started calling for a Melt Up in stock prices… including one of the true greats…
 
"GMO's Jeremy Grantham Says Stocks Could Be Heading for a 'Melt-Up'," Bloomberg reported last week.
 
That story must have struck a nerve. Friends from all over the world e-mailed me to ask, "Did Jeremy Grantham steal your Melt Up thesis?"
 
I appreciate friends (and subscribers!) having my back – knowing that I was probably the first one regularly writing about the likelihood of a Melt Up in U.S. stocks.
 
And I'm flattered that people think Grantham "stole" my idea. But the reality is, when it comes to bubbles and melt ups, few people know more than he does.
 
If you want to learn more about today's Melt Up relative to previous stock market bubbles, I strongly urge you to read a paper Grantham put out last week…
 
In that paper, Grantham says he knows that prices are high – but high prices aren't what kill a bubble. He writes…
 
Indicators of extremes of euphoria seem much more important than price… Not nearly enough signs of euphoria [are] yet present to make this look like a late-stage bubble.
He then details several of his early warning indicators… which are similar to the early warning indicators I've written about (like the advance/decline line, a measure that shows if more stocks are going up than down).
 
Grantham makes the case that the stock market could reach bubble proportions later this year, or into the next…
 
He put specific numbers and dates on it (which is always dangerous to do!). He said:
 
A range of 9 to 18 months from today and a price rise to around 3,400 to 3,700 on the S&P 500 would show the same 60% gain over 21 months as the least of the other classic bubble events.
He concluded by saying, "A melt-up or end-phase of a bubble within the next 6 months to 2 years is likely." And if the Melt Up does arrive, he says the odds of a subsequent "Melt Down" are "very, very high."
 
I agree.
 
I expect that you will hear a lot of talk about bubbles in the next two years. Most of the folks talking will have no idea what they're talking about.
 
Jeremy Grantham, on the other hand, knows bubbles as well as anyone ever has.
 
If you want to learn more about today's Melt Up – and the potential subsequent bubble – I highly recommend reading his research paper on the subject called "Bracing Yourself for a Possible Near-Term Melt-Up." It's available as a free PDF download on his company's website, www.GMO.com. (Or, you can go straight to the article by clicking here.)
 
Thanks again to friends who came to my defense as a lot of new voices are talking about a possible Melt Up. Some of those experts may have borrowed my work. But I doubt Grantham did… On the contrary, I've learned more from him about bubbles than just about anyone.
 
You should learn about bubbles from him, too…
 
Good investing,
 
Steve
 

Source: DailyWealth