How to Spot the Best Trading Opportunities in the Market

Editor's note: This week, we're interrupting our regular schedule to share an important essay from our colleague Greg Diamond. Greg is a former hedge-fund trader and our in-house expert when it comes to technical analysis. Today, he'll explain some of the tools that help him find attractive trading setups…
 In yesterday's DailyWealth, I showed you how to invest in an entirely new way
Today, I'm going to share several of my favorite technical indicators and patterns. Becoming familiar with them will help you to spot the best trading opportunities in the market.
Hundreds of technical terms and different uses exist in the markets. But the indicators I'm discussing today are what I have found to be the most useful…
As I said yesterday, this is most likely a brand-new way to look at the market for most people… So it's going to take some time to get used to.
But once you understand the basics, I promise you'll begin to see the market like you've never seen it before. Let's get started…
 First up is price divergence…
I look for price divergence across major indexes. When one index makes a new cycle low (or high) while another doesn't, this creates divergence.
That's usually a sign of a reversal on the horizon. It can be tricky to spot this pattern, but it's valuable to understand…
Notice the divergence between the Dow Jones Transportation Average and the Dow Jones Industrial Average…
You can see that the Transports' lows (the red trend lines) are much lower than the Dow's lows (the green trend lines). You can also see that these lows in the Dow trended up ("higher lows") while the lows in the Transports trended down ("lower lows").
This is a divergence between the two indexes. Notice how the divergence in both instances above resulted in a big move as both indexes shot higher.
 Next, let's look at moving averages…
Moving averages are constructed by taking an average of a time series over a given period. The 50-, 100-, and 200-day moving averages ("DMA") are widely followed averages to determine support and resistance points.
Many trading systems are geared around these averages in some capacity.
Right now, the 200-DMA on the S&P 500 Index is at a big support level (meaning the S&P 500 hasn't dipped far below it in a while). You can clearly see it in the chart below…
 Now, let's talk about price symmetry…
The market tends to trade in equal legs or movements, especially in corrective patterns.
Specifically, in a bull market, a correction usually has three legs, where the length of the first leg is equal to the third leg. Here is a perfect example of price symmetry from the S&P 500 last year…
Notice the first leg in each pattern is about the same size as the third leg. Also, notice how after the third leg was complete, the market rallied.
Spotting price symmetry is important.
 The relative strength index (or "RSI") measures the momentum of a stock's price…
It uses a scale from 0-100. A reading of 30 tends to be at or near oversold levels and a reading of 70 tends to be at or approaching overbought levels.
You can see the RSI and how it hit the 30 level at the bottom of this chart in the S&P 500. After that, prices rallied…
 Similar to price divergence is RSI divergence…
This metric looks for differences between the price of an asset and its RSI level. This can signal buyers losing momentum on the upside, or sellers losing momentum on the downside…
Look at the circled points on both the chart and RSI indicator in the bottom panel. Do you see how the trend in price is rising while the same points on the RSI are declining?
This is divergence – and it was a warning sign of buyers losing momentum. Notice how prices fell for another two months after this signal triggered.
 One of my favorite trading strategies is "ratio analysis"…
I'm constantly looking for the biggest trends in play as they relate to other asset classes or sectors of the stock market.
As a trader, I want to own what goes up and sell short what goes down.
Within the stock market, certain sectors behave differently given the current environment. Sector ratio analysis cuts through the weeds of individual companies and graphically shows what sectors are outperforming the overall market. Take this example of the Technology Select Sector SPDR Fund (XLK) versus the iShares U.S. Real Estate Fund (IYR)…
This chart reveals that buying XLK and selling short IYR would be a great trade.
Another example of ratio analysis is used on different asset classes…
This chart shows what would have happened if you bought gold and sold stocks. In other words, you would have lost a fortune.
This is ratio analysis at its best. It signals the best trends relative to other asset classes to allocate to your portfolio – and more important, the assets or sectors to avoid.
This type of analysis is also fantastic at signaling a change in correlations between asset classes – a critical component to understanding major shifts in economic trends.
 One of the biggest aspects of technical analysis that gets overlooked is time…
The history of the market repeats, usually in cycles. Finding those cycles can be difficult, but using time as a roadmap for what to expect is critical for successful investing.
I've spent more than a decade studying the history of the market and extrapolating the data to better understand when to expect a move. The key is to understand the larger cycle in play and then use the shorter cycles to identify turning points within each month.
It is not an exact science – nothing in the market is. But combining the technical indicators above with time-cycle analysis can be a very powerful combination…
 I can sum up my approach to trading with a quote from one of the most successful hedge-fund managers alive…
Famed investor Stanley Druckenmiller once said diversification is a dirty word. "Put all your eggs in one basket and watch the basket very carefully," he said.
That quote profoundly changed my thinking on investing and portfolio management.
I attended an exclusive, invitation-only conference at Goldman Sachs, where Druckenmiller and President George W. Bush were the main speakers.
I'll save the details of the speech for a more appropriate time, but I want to emphasize how important this idea is… that being too diversified and having too many baskets with too many eggs in them can wreak havoc on performance.
In my experience, more positions mean more problems. That's why in my new Ten Stock Trader service, I'll only recommend a maximum of 10 positions at a time. This will allow me to focus all of my energy and attention on a limited number of positions.
It keeps things simple.
 I'll also allocate a large percentage of the trades to a core macro view…
What does this mean? It means I have a medium- to longer-term outlook on the future of the major asset classes – stocks, bonds, precious metals, and commodities.
This is where the short-term trading of options and technical setups come into play. Many global macro hedge funds trade their portfolios this way every day.
We'll trade exchange-traded funds (ETFs). I'll recommend these ETF trades to track major stock indexes like the S&P 500 or sector trades like IYR. I'll recommend both long and short positions.
We'll also trade naked call and put options, along with more complex options strategies like "risk reversals," "call spreads," and "put spreads." If you aren't familiar with these strategies, don't panic. The names sound sophisticated, but I'll explain each trade in detail.
Finally, we'll trade individual stocks.
I analyze thousands of charts every single week. I'm looking for a combination of various factors (many of which I've outlined above) to determine the best trading setups.
 I saved the most important note for last… position sizing and risk management.
The instructions for each trade in Ten Stock Trader will be based on a percentage of your portfolio. For example, if I say to buy a 10% position in XYZ stock and you have allocated $100,000 to Ten Stock Trader, then you'd buy $10,000 worth of XYZ stock for that trade.
I will always indicate the percentage allocation on every trade. Make sure you follow these instructions. Never risk your entire portfolio on one trade. Ever. Period.
This is the No. 1 reason why investors go broke.
 Now, if this sounds like something that would interest you, I have a favor to ask…
You see, we recently went live with the "beta testing" of Ten Stock Trader.
We typically only share opportunities like this with our lifetime Stansberry Alliance subscribers, who pay thousands of dollars to access all the products we offer. But for the first time ever, we're giving any interested readers the chance to beta test this product…
Best of all, you can get access today for 85% off the price others may pay in the future.
We're doing this for one simple reason… We want to hear what you think about the product – and we want you to be brutally honest. Find out how to become a beta tester right here.
Good investing,
Greg Diamond
Editor's note: We just launched the beta version of Greg's brand-new Ten Stock Trader service… Each week, he plans to share as many as 10 setups that could help you potentially double your money – or more – every six months. And if you sign up right now, you can get instant access at 85% less than what others could pay in the future. Get started right here.

Source: DailyWealth

How to Invest With the Power of Human Nature

"Human nature never changes…"
"History repeats itself…"
These adages stick around because they're true.
They're even true in the markets. The ups and downs of the market are nothing more than the graphic representation of human behavior… expressed on a chart of buyers and sellers. And this market behavior tends to repeat.
That's how technical analysis works. We know what's happening because we've seen this all happen before.
Today, I'll explain more about how we can use this to our advantage as investors…
Here is a perfect example of a type of technical analysis that warned of a storm brewing at the start of 2007… WELL before the market crashed in the financial crisis.
It's called "intermarket analysis." This idea is based on correlations between asset classes. When one of these asset classes turns down, it may be a warning sign for other asset classes (in this case, stocks).
We know this, because these chart patterns have shown up before, and those other assets have fallen.
Take a look at this chart. It shows the relationship between the S&P 500 Index (in black) and U.S. 30-year interest rates (in blue), right before the financial crisis…
The S&P 500 and U.S. 30-year interest rates traded in tandem for much of the early 2000s – then, in late 2007, the correlation broke down. Interest rates started to turn down – a sign of a slowing economy.
Look at the red line
See how stocks made new highs, while interest rates failed to? That was a warning that something was wrong.
Of course, most of the fundamental analysts at the time pointed to strong earnings and solid "fundamentals."
The ultimate fundamentalist – former Federal Reserve Chairman Ben Bernanke – proclaimed around this time that the effects of "the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."
You know what happened next.
This is the essence of technical analysis – understanding the behavior of markets and history. This concept is lost on many investors, who simply write it off. They just don't understand and aren't willing to put in the necessary time and effort.
Technical analysis is much more than trendlines and charts. It is understanding the past to profit in the future.
I will be honest…
It took me a while to grasp technical analysis, too. But time and time again, I've witnessed how well it works.
I want you to see much more than the trendlines and patterns, and understand that we are studying the behavior of market participants… We are learning from history.
And to do this, we don't need to speculate about the reasons behind the behavior. We don't need to worry about fundamentals.
There's nothing wrong with wanting to know WHY a certain stock will move… But I am much more concerned with WHEN that stock will move and WHAT the price will do (i.e. how much it will go up or down).
And think about what really matters in investing – WHEN you buy and WHEN you sell. The WHY is less important when it comes down to the goal of investing: Did you make or lose money?
That's all that matters.
Perhaps the greatest value in technical analysis is that it is both a trading strategy and a risk-management system wrapped into one. It shows us opportunities – and warnings. And it keeps us focused on making and preserving wealth.
If you're like most people, this is most likely a brand-new way to look at the market. So it's going to take some time to get used to.
But once you understand the basics, I promise you'll begin to invest in an entirely new way.
Good investing,
Greg Diamond
Editor's note: Right now, we're looking for folks to "beta test" Greg's brand-new Ten Stock Trader product. It's an unexpected way to potentially double your money – or more – every six months… And for a short time, you can get your foot in the door for a discount of up to 85% off what others may eventually pay. Click here for more details.

Source: DailyWealth

Housing Is Up Big… And It's Still a Great Deal

This week, my colleague Brett Eversole sold his house here in Florida after just a couple days on the market…
He'd barely gotten the "For Sale" sign in the yard before he had multiple offers – including a CASH offer AT ASKING PRICE.
The asking price was 29% more than he paid for it in 2013. He took the deal.
You might wonder, is this example a good representation of the coastal Florida housing market today?
The short answer is "yes."
But don't let this lead you to the wrong conclusions…
The housing market is up a lot – that's true. But it's not expensive yet. Let me show you why…
In the early 1970s, a typical new house in America was about 1,500 square feet. Today, a new house in America is about 2,500 square feet – 1,000 square feet larger than houses were 45 years ago.
When you take this into account, you learn that house prices today – per square foot – are actually about the same as they've typically been over the last 45 years.
Let's get into the specifics…
The median existing home price in America today is about $250,000. Meanwhile, the median size of a new home in America is roughly 2,500 square feet. So that math is easy – that's roughly $100 per square foot for the median house.
Forty-five years ago, the math is nearly identical (when you adjust for inflation). The median house size was just over 1,500 square feet. And the inflation-adjusted price of a home in the early 1970s was just over $150,000.
Here's what this measure looks like over the past 45 years:
I find this chart fascinating, for two reasons…
•   You can clearly see how extreme the housing bubble was in 2006.
•  Just as impressive, you can see how extreme the housing bust was by the end of 2011.
There's a good chance that – for the rest of my life – I'll never see a buying opportunity in housing as good as it was in 2011-2012. (Hopefully, you took my advice back then and loaded up on property!)
This chart also tells us something else…
Sure, house prices in America have run up – a lot – from the bottom. Even based on price per square foot, house prices are up nearly 25% from their lows in 2011. However, even after that run up, this measure is still below its long-term average.
But this chart DOESN'T show one important thing…
Houses are more affordable today than just about any time in that chart.
Consider the difference in 30-year mortgage rates today, compared with 1981:
30-Year Mortgage Rate
October 1981
April 2018
No big deal, right? It's a different interest rate… so what.
It is a big deal. 1981 was the peak in mortgage rates. If rates were at 18.5% today, we'd be in trouble…
On a $250,000 loan at 4.4% interest, you would pay about $1,250 a month for 30 years. Over the life of the loan, you would pay about $200,000 in interest.
On the same $250,000 at 18.5% interest, you would pay about $3,870 a month for 30 years. Over the life of the loan, you would pay $1.1 million in interest.
What's hard to imagine is that my parents actually would have paid those types of interest rates back then!
I have two points for you today…
First: Sure, house prices have gone up since 2011. But houses today are not that expensive yet… Prices are actually just around their 45-year median, based on the chart above.
Second: When you factor in interest rates, it's easy to see how much cheaper a house is today than it was in 1981, for example.
U.S. housing is not expensive, relative to history. In my opinion, we still have plenty of upside left.
I've put my money where my mouth is on this one… Florida real estate near the coast is still the biggest part of my own financial net worth (not including my home).
Yes, my friend, the housing market is hot. But no, it's not time to worry at all.
Good investing,

Source: DailyWealth

We're Nearing a Historic Moment for the Markets

Steve's note: My colleague Greg Diamond used to manage portfolios worth millions of dollars. Then last year, he joined our company… And right away, he started sharing his insights and methods with my young team.
That's how I know you're in good hands. You see, Greg has mastered a unique style of trading. In this piece, he shares a little about how it works… And he explains why we should prepare for big opportunities over the next few years.
I couldn't care less about a stock's fundamentals.
Now, don't get me wrong… If you're buying a stock and planning to hold it for years, fundamentals are critical. But in the short term, fundamentals don't matter.
Instead, what I focus on is technical analysis. This kind of trading shows you what's happening in the markets right now – the patterns of buying and selling that are taking place in the moment.
In my experience, too many investors spend their time wondering why the market is moving instead of focusing on how to profit from it.
Right now, the patterns I'm seeing are telling me that something big is coming. We're nearing a huge inflection point in the markets… And I want you to take advantage of it.
Some people think technical analysis is all about chart reading. But it's much more advanced than that. The biggest component of technical trading is about behavioral finance.
Human behavior – what investors are doing in the markets – never changes. And if you study history and obsess over patterns, you'll see that behavior in the markets goes in cycles.
In other words, what has happened before will typically happen again.
This is a technical concept called "time cycles." It comes from legendary trader W.D. Gann, a market theorist from the early 20th century. He found that markets move in symmetrical cycles. If you can understand them, you're better able to predict tops and bottoms in the market.
For example, as I recently showed my readers, the stock market appears to reach an important turning point every nine years…
1982: In March 1982, we saw a short-term bottom in the Dow Jones Industrial Average that led to a double-digit rally… and eventually a meteoric rise that ended in March 1991.
1991: After the spike ending in March, the Dow Jones traded sideways all year. In this case, our turning point was different – the market hit a wall.
2000: The "dead money" of 1991 gave way to another huge rise – culminating with the peak of the tech-stock bubble in March 2000. From 1992 to the top, the Nasdaq 100 Index skyrocketed about 1,300%.
•   2009: Nine years after the dot-com peak, the market bottomed out during the Great Recession in March 2009.
Now, over the past nine years, we've seen a historic bull market. It's a safe bet that we're approaching an important moment… a major turning point for investors.

Based on history, I knew at the very least that last month was going to be a seriously volatile period for stocks. Sure enough, over a period of 10 trading days in March, the S&P 500 Index fell more than 7% – a huge move for a major market index.

So what's coming next? How long will all this volatility continue? Time cycles may provide an answer…

In September, I noticed the market forming an interesting pattern – one that I'd seen before. You see, over a 26-month period from March 2009 to May 2011, the Dow Jones Transportation Average more than doubled. And it looked like something remarkably similar was happening again…

The last time we saw a 26-month run like this, the market stalled out before continuing higher.
I told my readers that based on history, a similar correction could happen again in the spring. And that's just about what happened… The markets fell 10% or more in early February.
Time cycles were able to tell us a correction was coming.
Not only that, but we can also see from 2011 that the recent correction could be another powerful catalyst for another leg higher – in today's case, what my colleague Steve Sjuggerud calls the "Melt Up."
How long before this rally could start? We can't know for certain. But when the first cycle top concluded in 2011, the period of volatility lasted three to five months.
Should that be the case this time around – and I believe it will – that will take us right into May.
Looking beyond that point… last year gave us the lowest volatility we've seen in years. I think that we are at an incredible inflection point in the markets that could potentially flip that on its head.
Technical analysis shows that when we reach these key moments in the market, we tend to see extreme moves in one direction or the other. That volatility gives us a chance to hit some home runs.
I believe we'll see extraordinary trading opportunities in the next two to three years. That's why we need to take advantage of this now – while this period lasts.
The markets will soon reach a critical point. But I'm not so concerned with whether they will go up or down. I'm concerned with the what and when… meaning what prices are going to do and when. I'm focused on how to trade what the market gives us.
That's how we'll make big profits… by hitting singles while we wait for our chance at a home run.
Good investing,
Greg Diamond
Editor's note: Our team was blown away by Greg's background in technical trading. So we're sharing a unique offer… Right now, you can "beta test" his new Ten Stock Trader service – and learn to trade like the hedge funds do – for up to 85% off what we expect to charge others in the future. Click here to learn more.

Source: DailyWealth

So What's Our Starting Point Here in 2018?

I was traveling to Argentina a lot in the early 2000s.
The country was in ruins. And as I explained yesterday, that experience taught me something important… After all those visits, I know what a good starting point feels like, down in my toes.
Times were tough in Argentina back then. But those tough times created a fantastic starting point for investors… It was a great opportunity to buy in cheap and make potentially huge returns.
So what does our starting point look like in the U.S. today?
At the bottom of the crisis in Argentina, money was hard to come by. And the country's benchmark stock index had fallen 90% from its highs.
It's easy to see that the U.S. today is NOT Argentina in 2002.
It's the opposite…
•   Money is easy to come by in the U.S. Interest rates are low, and every banker wants to lend you money.
•   The stock market isn't down 90% at all… Instead, U.S. stocks have not had a losing year in the past nine years (when you include dividends).
For investors, it's all about the starting point. And the starting point today in the U.S. is, well, not good…
You might be shocked to hear this, but based on our starting point, U.S. stocks may deliver no return – or even a negative return – for the next decade or even longer.
Let me show you how this might be possible…
I said U.S. stocks have been up for nine years in a row. This has happened only once in the past century.
What happened last time? It's the basis for my "Melt Up" thesis…
The only other time stocks went up nine years in a row was during the 1990s.
The returns were massive… at first. But it ended badly – with the dot-com bust. The Nasdaq Composite Index lost 80% of its value from peak to trough.
If you bought right at the dot-com peak, it would have taken you 14 years to break even.
U.S. stocks also had eight consecutive winning years (a similar time frame) during the Roaring Twenties… Then, the Great Depression hit. And stocks lost money in nine out of the next 13 years.
If your starting point for buying U.S. stocks was the peak in 1929, then you wouldn't have broken even until 1946, based on the S&P 500 Index.
My point is, your starting point for investing matters. And in the stock market today, our starting point is not good.
In the bond market, it's not good either… The U.S. government will pay you less than 3% interest if you lend it money for 10 years.
Does that sound like a good long-term deal to you?
I don't think so. Legendary investor Jeremy Grantham agrees with me…
Using his seven-year forecasts for U.S. stocks and bonds, you're looking at a real return of negative 3.6% per year over the next seven years in a 60/40 portfolio (60% stocks and 40% bonds).
This is one of the most basic portfolio allocations that investors can use. The typical mainstream investing advice is that "you can't know the future, and a 60/40 portfolio is what has performed well in the past."
It's true – typically, a 60/40 mix of stocks and bonds has delivered an 8%-plus return over history. But the problem is the starting point… That's why Grantham expects a negative return for the next seven years.
This negative 3.6% return isn't based on unreasonable assumptions, either. Grantham only assumes "reversion to the mean" – that is, valuations returning to normal.
Are you willing to accept 14 to 17 years of no return on stocks, like we saw after the peaks in 1929 or 2000?
We are pretty darn close to a bad starting point now. Negative 3.6% a year doesn't sound good to me.
So what do we do? Here's my simple plan to combat this bad starting point over the next seven years:
•   Keep riding the "Melt Up" for another 18 months – at least.
•   Then, shift gears completely and get more conservative.
•   Invest in alternatives to traditional stocks and bonds.
This is similar to what I did in the early 2000s. U.S. stocks were a bad deal, so I found ideas like gold coins and investments in Argentina.
Today's starting point is beginning to look bad… So we have to shift our thinking in the years to come.
Importantly, we're not there yet. The Melt Up isn't over. There's still money to be made in U.S. stocks.
Just know that someday soon, you'll need to make a major shift in your investments. If not, our poor starting point could mean years of losses for your portfolio.
Good investing,

Source: DailyWealth

It's All About the Starting Point

We're about to land a King Air private plane in the jungles of Misiones, Argentina…
It's June 2004. I'm sitting across from a brilliant young woman who works for one of Argentina's greatest-ever businessmen. I'm representing a billion-dollar hedge fund. And we're headed into the trees below.
She's talking to me… But honestly, I'm struggling. The plane is bouncing around in the sky, and the engine noise is loud inside the plane. I'm feeling queasy.
"How the heck did I end up right here, right now?" I said to myself.
Oh yeah, this was my idea…
I thought of an investment idea, and I shared it with two friends – one of Argentina's richest men, and a man in New York who (at the time) ran a billion-dollar hedge fund.
We needed both men to make it work… the hedge-fund manager for the money, and the Argentina connection for the local knowledge.
The critical thing here as investors was our starting point.
As an investor you need to understand this:
It's all about the starting point. That's how you make the most money – by buying cheap assets at the right time.
To understand our starting point back then, let me explain what Argentina looked like in the early 2000s…
We were going to Argentina because the country had just experienced a massive economic crisis that ended in 2002.
I'm not talking about a crisis like the real estate bust in the U.S. a decade ago. I'm talking about something far worse…
As one example, the Argentine government announced a "bank holiday" – which was as far from a "holiday" as you can imagine…
One day the banks were open. The next day, they closed – indefinitely ("on holiday"). Seriously…
Argentina's government ordered the indefinite closure of the country's banks in order to prevent the collapse of Argentina's currency. And cash withdrawals were limited to $500 a month. (Not $500 a day. $500 a month!)
If you were "rich," but your money was in the bank, then you were now broke. You truly had no access to your money.
Many locals thought they might be safe from Argentina's problems because their money in the bank was in U.S. dollars instead of pesos. Someday when the banks reopened, locals thought, they'd get their money.
It turned out, even these folks were not safe…
When the banks finally reopened, no one could get their dollars out. The government had converted the dollars to pesos. And in 2002, Argentina's currency lost three quarters of its value against the U.S. dollar over six months.
So if you had $100,000 in U.S. dollars in the bank at the end of 2001, you now had $25,000 worth of pesos in mid-2002.
So when I tell you that people were scared of putting their money into Argentina back in the early 2000s, hopefully you can see why.
Money (like a loan) was incredibly hard to come by in Argentina.
By the bottom of the crisis in 2002, Argentina's economy had shrunk by more than 25%. By June that year, Argentina's benchmark stock index (the Merval) had fallen 90% from its highs in U.S. dollar terms.
Nobody wanted to invest. There was no money or credit available. And the stock market was down 90%.
It was a terrible time for Argentina. But it created a great starting point for investors
The local businessman we teamed up with ended up investing in the timberland we visited. He bought thousands of "useless" acres that he turned into "economic" acres by planting trees.
And Argentina in general made a spectacular turnaround after the fantastic starting point I witnessed firsthand.
Argentina's stock market soared by 600% in less than four years (in U.S. dollar terms) from the bottom of the crisis in 2002.
Anyone who invested in Argentina after the crisis bottomed should have made a fortune in a short period of time.
For investors, it's all about the starting point.
So where are we right now in the U.S.? What's our starting point here, today, in 2018?
I'll answer those questions, including the script I plan to follow in the years to come, in tomorrow's DailyWealth.
Good investing,

Source: DailyWealth

Despite the Recent Controversy, This Stock Is a 'Buy' Today

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 We expect one thing no matter what happens next…
Whether a serious bear market begins later this year as our founder Porter Stansberry has warned… or the "Melt Up" runs for another 18 months or more as our colleague Steve Sjuggerud has predicted… we believe stock market volatility is likely to remain elevated in the months ahead.
In fact, as Steve has pointed out, the last Melt Up in the late 1990s saw market-leading tech stocks soar more than 200% over the last year and a half of the rally.
Yet these same stocks fell roughly 10% – similar to the sharp correction we've seen this year – on five separate occasions over that time. And along the way, the market's "fear gauge" – the Volatility Index ("VIX") spiked above 25 more than 10 times.
History is clear: Melt Up or "Melt Down," last year's historic tranquility is unlikely to return anytime soon.
 But if you're betting on higher volatility today, there's something you should know…
So-called "long volatility" has suddenly become a popular trade. As the Wall Street Journal reported earlier this month…
Stock-market swings in the past week have many investors scrambling to profit from the return of turbulence after a prolonged period of tranquility…
"The new safe haven is now volatility," said Christopher Stanton, chief investment officer at California-based Sunrise Capital LLC. "It's the one thing that's pretty much guaranteed."
Mr. Stanton is among those who are buying futures contracts pegged to the VIX, a profitable bet if volatility continues to rise. In the past two weeks, both hedge funds and asset managers have been doing the same, according to data from the Commodity Futures Trading Commission.

In other words, the same folks who were making record bets against volatility earlier this year – many of whom suffered huge losses during February's "volatility panic" – have flipped sides. They're now making record bets that volatility will move higher. The following chart puts this change in perspective…
These speculative traders are known as the "dumb money" for a reason. They tend to be wrong at extremes. When they're all making the same bet – whether they're all super-bullish or super-bearish – it's a sign that the trade is "crowded" and a short-term reversal is likely.
As always, today's extreme doesn't mean the VIX can't move higher in the near term… And again, we continue to expect volatility to trend higher in the months ahead. But speculators are suddenly super bullish, which suggests the greater risk is to the downside today.
 Profiting from a rising VIX is notoriously difficult under the best conditions.
Even during periods of elevated fear and volatility, the VIX doesn't remain at highs for long. It spikes and falls – often dramatically – before spiking again.
Meanwhile, the two primary ways to bet on a higher VIX – buying futures contracts directly, or buying exchange-traded funds ("ETFs") that own these futures – have a significant cost. Due to the nature of these contracts, they tend to lose value over time. This means you can actually bet correctly and still lose money if your timing is off.
Today, the odds are stacked even further against you. If you're interested in speculating, be sure to keep your position sizes small and don't risk anything you can't afford to lose.
 Switching gears, you've likely heard about the controversy surrounding social media giant – and Stansberry's Investment Advisory portfolio recommendation – Facebook (FB).
In short, news broke last month that London-based data-analytics firm Cambridge Analytica had gained access to – and improperly used – the personal data of more than 50 million Facebook users as part of an effort to influence the 2016 U.S. presidential election.
The news got even worse earlier this month when Facebook said the real number of users affected by the breach was closer to 87 million. And of course, this news follows the company's admission last fall that Russian-backed operatives had exploited its site to try and influence the election as well.
 Facebook shares have plunged as a result of this controversy…
The stock is down about 15% from its February highs… and the company has lost roughly $100 billion in market value in the process. The big decline has left some folks wondering if the company's best days are behind it… and whether it's time to sell.
Porter and the Stansberry's Investment Advisory team say the answer is clear: absolutely not. As they explained in the April issue…
We sell when we hit our stop or when the story changes. Neither has happened in this case. Our fundamental thesis for owning Facebook shares remains intact. And we still see the stock as a solid investment over the longer term.
In spite of the controversies surrounding Facebook, the world continues to log in. Billions of users continue to interact with each other, sharing stories, "liking" photos, and consuming content from companies, movies, musicians, and other advertisers. They're not leaving en masse. Facebook is too big of a part of their daily lives… And for most users, there's really nothing else like it.
You see, as we explained in our December 2016 recommendation, Facebook's business possesses the most powerful "network effect" we've ever seen. Its business gets better as it gets bigger. The more users who log in to Facebook and share their stories and photos, the more attractive the website is for that next user to join. And as more consumers join the site, more information is shared, and so on. And of course, the more users, the more valuable their data and eyeballs are to advertisers.

 As they explained, a business like Facebook often struggles to attain "critical mass"…
But once it does, it's incredibly hard to compete with. More from the issue…
Growth begets more growth. Momentum increases. And the winner tends to take all – or at least take most. That's what has happened with Facebook. It is the clear winner in the social networking space (at least, outside of China). With more than 2 billion monthly active users, it's many times more popular than the next largest competitor. And that makes Facebook an incredibly powerful economic engine and cash-flow machine.
Simply put, Facebook is one of the most capital-efficient companies we have ever seen. And that's even with no long-term debt and more than $41 billion of its capital base in the form of low-yielding cash…
Facebook's scale, growth, and profitability are truly in a class by themselves. And so as long as the news flow isn't so bad that a substantial number of users delete their accounts, we will want to own shares.

And fortunately, despite what you might assume given the news coverage, they don't believe an "exodus" is even close to occurring today…
Sure, we hear isolated anecdotes of "this advertiser leaving" or certain user groups pushing for change (including a #deletefacebook campaign that appears short-lived). And that might slow profit growth and soften user metrics, causing continued choppiness in the stock over the short term.
But the long-term capital-efficient machine is intact. So for those with a longer-term investment outlook, Facebook remains a "buy"…

 While Porter and his team believe Facebook will fully recover from this controversy, there is no denying that data breaches like this are becoming incredibly common… And increasingly costly.
"Hacking" already costs the global economy more than $450 billion a year. At its current pace, this figure could grow more than tenfold over the next decade. And no one – not even the government itself – is immune. In fact, there's virtually nothing any of us can do to fully prevent getting hacked today.
But that could soon change
You see, several notable cybersecurity experts believe blockchain technology – yes, the same blockchain technology that powers bitcoin and other cryptocurrencies – could put an end to computer hacking and identity theft once and for all.
Even better, the Stansberry's Investment Advisory team has identified one tiny company in particular that is leading this revolution. They believe buying this stock today could be like buying online-security company Check Point Software Technologies (CHKP) at the start of the Internet boom… before it soared from $4 to more than $100. Click here for all of the details.
Justin Brill
Editor's note: Less than 1% of people around the world use blockchain today. But in a few years, experts predict it will become a $3.1 trillion market. And early investors could make a fortune by betting on the right companies. Learn more about this coming tidal wave right here.

Source: DailyWealth

How to Tell If a Stock Is Cheap… Or If It's Just a Value Trap

A value trap is like quicksand for your money.
First your money gets stuck… Then it slowly sinks (in value).
History has shown that buying cheap stocks gives you better returns than buying expensive stocks over the long term. But in order to get those returns, you have to be sure that "cheap" is not a permanent state of affairs.
If it is, you won't be getting the return you expect. And you might not get any return at all. Your money will just be stuck… and slowly sink in value.
Today, I'll discuss how to know if a stock is really cheap… or if it's just a value trap.
Whether a stock is cheap or expensive depends on its valuation… not on the share price itself.
A stock that trades for only $1 can be expensive if it trades at a high valuation. And a $100 stock can be cheap if it trades at a low valuation.
We can measure a stock's valuation in a number of ways. You've probably heard of two of the most popular methods to value a stock – the price-to-earnings (P/E) ratio and the price-to-book-value (P/BV) ratio.
These involve looking at the fundamentals of a company – things like how much they earn, how much they sell, and how much debt they have – and measuring them against the market price of the stock.
Of course, a stock's valuation has many ingredients. And if you dig deeper, a cheap-looking stock might not always be as cheap as its valuation suggests. Bad management, deteriorating assets, product obsolescence, a long track record of poor capital-allocation decisions… All of these are the ingredients of a value trap.
One kind of value trap to watch for is an earnings-driven value trap.
This happens when a stock seems cheap because it has a low P/E ratio (calculated as the price of the stock divided by the earnings per share). But if earnings keep falling, the P/E ratio will climb.
For example, if a stock is trading at $5 per share, and its earnings are 50 cents per share, it will have a P/E ratio of 10. But if the share price stays the same and earnings drop to 35 cents per share, the P/E ratio would climb to more than 14. That's a lot less cheap.
Investors tend to fall into this trap when a stock's price falls slightly. It looks cheap. But then earnings drop, and what was cheap is now less cheap – even though the stock price hasn't moved up. Then earnings decline again, and what once looked cheap is now downright expensive because earnings have fallen so much.
Now, a value trap can stop being a value trap – and become an attractive, undervalued investment – if something changes. New management, a big shift in the industry, higher commodity prices, a regulatory change… All of these things can turn a value trap into a great investment.
How can you avoid value traps? For starters, don't invest just because valuations seem low… They might have been low for a long time. Don't necessarily take valuation metrics at face value.
When you're gauging a company's true value, here are a few questions to ask yourself…
First, how is the company's debt profile? You want to avoid companies that are loaded with debt.
Second, is revenue growing? A company that isn't generating more in sales every year will have a difficult time earning more money every year.
Third, is the industry or sector as a whole growing? If not, that's another reason a company might have a difficult time increasing revenues and earnings.
Finally, does the company operate in a cyclical industry (like commodities, for example)? If so, you'll need to time your purchase so that you don't get sucked into a value trap.
And if the company is in what's called a "structural" decline – which can happen after a fundamental shift in a business or industry – it can mean that demand for the business, and sometimes the industry, will never recover.
In short, cheap is usually good. But not always. Value traps can punish your portfolio even more than buying a stock that's too expensive in the first place.
Good investing,
Kim Iskyan
Editor's note: Finding cheap, profitable investments is crucial in the stock market… and the real estate market, too. Kim's colleague Peter Churchouse made a fortune with great deals in real estate – and now, he's publishing his secrets. Steve says this book is a "cult classic in the making." But you won't find it on Amazon or in bookstores. To learn how to claim your copy, click here.

Source: DailyWealth

My Biggest Investing Edge: 'Variant Perception'

"So why are you so excited about China, Steve?" talk-show host Buck Sexton asked me this week on the Stansberry Investor Hour podcast.
The answer is simple.
It is actually my biggest edge in investing.
But almost nobody does it…
My answer applies not only to China, but to basically every successful investment I have ever made. It is this:
Whenever you find a big gap between perception and reality, you can often make a lot of money.
The American perception of China versus the reality on the ground is as big a gap as I have ever seen in my investing life.
As that gap closes, someone is going to make a lot of money. And I believe it will be my subscribers. (That's why I launched my True Wealth China Opportunities service… And it's why I've urged my readers to invest in China here in DailyWealth.)
The thing is, most investors don't invest this way. They might think that they do… but they don't.
Instead, most investors look for the best horse in the race – based on their investing criteria – and then they bet on it.
Sounds sensible. But there's a BIG problem with doing things this way…
Investors forget that other investors – using the same criteria – are betting on the same horse. They're all betting on the odds-on favorite at the Kentucky Derby. If it wins, you don't make much. If you are wrong, you lose it all.
In investing, you will never dramatically outperform if what you're doing isn't dramatically different from your peers. I believe the perception-versus-reality gap is an even more important criterion for success than the value of whatever it is you are betting on.
As horse-betting legend Steven Crist says, "The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual chances of victory… Under this mindset, everything but the odds fades from view."
According to him, all you need to look for is "an attractive discrepancy between his chances [of winning] and his price."
Legendary hedge-fund manager Michael Steinhardt has a term for this type of thinking. He calls it "variant perception."
Variant perception, according to Steinhardt, is "holding a well-founded view that was meaningfully different than the market consensus." It is understanding that market expectations are "at least as important as – and often different from – the fundamental knowledge."
If you want to dramatically outperform… yet you are using the same analysis tools as everyone else… then you are doing it wrong.
Instead, think of variant perception. Think of horse race betting – look for "an attractive discrepancy" between the chances of winning and the price. And think of my China idea – where the gap between perception and reality is huge.
If you want to outperform, you have to work on ideas that are "meaningfully different than the market consensus."
All of my own really big investment successes have happened specifically because of this way of thinking.
I urge you to try this way of thinking about your investments too…
Good investing,
P.S. If you'd like to hear my full interview on China, check out the latest episode of the Stansberry Investor Hour podcast. You can subscribe for free on iTunes right here, or on Google Play right here.

Source: DailyWealth