If you take nothing else from this story, I hope you remember these two things – and I hope you really take them to heart…
The Melt Down is coming, my friend… Unfortunately, it will arrive this year.
Until it arrives, let’s enjoy the Melt Up while we can.
I’ve been pounding the table for years about the Melt Up — the massive, blow-off top in stocks at the end of a major bull market. And regrettably, what follows is the eventual Melt Down.
Now, before you get bent out of shape with me for urging caution at the precise moment when things seem like they’re getting really good, please keep this in mind:
I have been bullish – and right – on the stock market for nearly all of the last 12 years. As investing guru Meb Faber has said, “Nobody has been more bullish and more right about the U.S. stock market since March 2009 than Steve Sjuggerud.”
I am proud of that. That’s why it pains me to tell you that the last 12 years of (mostly) good times for investors will likely end this year. (Nobody can know the future of course, but that is my prediction.)
I don’t want to see that happen. But my years of experience tell me it’s coming – and I want you to be ready.
For the majority of investors today, how you handle the Melt Down could be the most important event of your financial life…
For the majority of investors today, how you handle the Melt Down could be the most important event of your financial life…
For example, if you are 55 years old and you play the Melt Down the wrong way, you might lose half of the money you have invested. That might cause you to work an additional 10 years before retirement… All because of a few bad decisions made in 2021.
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So… don’t be that guy.
Look, here are the basics: An investment “bubble” has just kicked in recently. And it will certainly end. Unfortunately, most folks who just started dabbling in the markets this year will lose money. A good portion of them will lose a lot of money.
Here’s how it will go:
• New investors will make a good amount of money on the way up. They will gain confidence.
• With that confidence, they will add even more money to their accounts, as they will believe they know how to succeed.
• Then the market will turn against them… and they will start to lose money.
• At first, they will see it as a golden opportunity to invest even more money, as things are “on sale.”
• Ultimately, they will lose even more money on the way down than they made on the way up.
It will take tremendous personal and emotional strength to avoid that path… to not end up like everyone else.
Your instincts will tell you to buy more. But your instincts will be wrong. In fact, you will need to do the opposite – you will need to sell, just when you feel like you want to buy.
Importantly, you will need a plan – set in advance – for how you will get out with most of your gains still intact. If you don’t have that plan in advance, then you will sink with the ship. And even then, having the plan doesn’t guarantee that you will follow it.
If you are to keep most of your money, you will need to follow the plan.
That’s because – unlike the fall we saw in March last year – a true Melt Down doesn’t end quickly…
“As the market goes down, will people rotate out of speculative stocks into less speculative ones?” one of my colleagues asked in the office.
“No, they won’t,” I replied. These market newcomers will ultimately give up after big losses. They will throw in the towel. They will pull what little money they have left out of the markets – and vow to never return.
At least that’s the way it went in the 1999 to 2000 Nasdaq Melt Up… that ended in an 80% fall in the Nasdaq stock index between the March 2000 peak and the bottom in 2003.
The exodus you see during a Melt Down doesn’t happen overnight. People are stubborn. It takes a while. Therefore, the Melt Down could, too. And it could be severe. This slow exodus gives us time to exit our positions before most everyone else.
My goal is to have us participate in all of the upside potential that is left in the Melt Up… and then get us out with most of our gains when the Melt Down arrives.
My goal is to have us participate in all of the upside potential that is left in the Melt Up… and then get us out with most of our gains when the Melt Down arrives.
Now, let me explain why the Melt Up will most likely end this year…
Why Will the Melt Up End in 2021?
“Steve, why are you so sure the Melt Up will end in 2021?”
It’s a fair question. The markets have been going up for years (with the exception of the COVID-19 crash a year ago). So why now? What makes this year different?
Your arguments are good ones:
• Stocks have been expensive for years and it hasn’t mattered.
• The Fed has promised low interest rates for a while.
• The economy is recovering from COVID-19.
• The new Biden administration will most certainly spend a lot of money creating jobs and sending out stimulus checks.
You are right on those points, and more. Heck, they’re some of the reasons I’ve said the good times would continue – and for longer than anyone imagined.
(My basic premise all along has been this: The Fed will keep interest rates lower than people can imagine, for longer than people can imagine. And that will cause asset prices like stocks and real estate to soar higher than people can imagine.)
Times are good right now, based on those points. In its latest Global Fund Manager Survey, Bank of America hit the nail on the head: “The only reason to be bearish is… there is no reason to be bearish.”
There is far more to that sentence than you might think. You see, that’s the exact situation you tend to encounter before markets peak.
Markets peak when there is nobody left to buy. That is all you need to know.
Specifically… Markets peak when there is nobody left to buy. That is all you need to know.
Unfortunately, we are getting close to that point right now. And that is exactly what makes this year different than previous years.
When music stars Snoop Dogg and Gene Simmons (of the band KISS) are talking up cryptocurrency Dogecoin on their Twitter accounts, you know speculating is starting to get out of control.
I have personally gotten texts from rock stars… from pro surfers… and from my kids’ friends… all wanting to get in on the game. None of them were interested in the markets a year ago. Heck, none of them were interested in stocks or investing just two months ago, at the start of this year.
The reality is, most of these folks are not looking to become students of the markets. Most aren’t looking to study the competitive position and profit margins of Target versus Walmart, to determine which stock could outperform the other over the next five to seven years. Instead, most of these folks are looking to make a quick buck on the next speculation.
They are simply looking to capitalize on the Greater Fool Theory…
They are hoping that by buying today, there will be a greater fool than them to pay a higher price tomorrow. But think about this for a second… Once Snoop Dogg, Gene Simmons, and all the kids in the local high school have put their money to work… where can the next greater fool possibly come from to drive prices higher?
“The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals,” legendary investor Jeremy Grantham wrote earlier this year. “For the first 10 years of this bull market, which is the longest in history, we lacked such wild speculation. But now we have it. In record amounts.”
That gets to the heart of it… Again, we’ve got rock stars (and Elon Musk!) pushing Dogecoin – which the founder admitted was formed as a joke and should never be worth much. That, to me, is “really crazy investor behavior, especially on the part of individuals.”
The thing is, to make the most money, you want to buy when everyone is fearful, and sell when everyone is greedy (to quote billionaire investor Warren Buffett). And right now, according to the Fund Manager Survey I mentioned earlier, money managers are the least fearful they have been – ever.
It’s not just money managers and celebrities that are “all in.” Individual investors – many of whom are buying for the first time – are getting on board…
An astounding 28% of all Americans bought GameStop or other viral stocks in January, according to a Yahoo Finance-Harris poll. The median investment, according to the poll, was just $150. The largest group of buyers was men aged 18 to 44. And 43% of these folks said they had just signed up to get a brokerage account in the last month.
So in both professional investors and in new individual investors, we have seen a dramatic shift in investor attitudes and behaviors. In short, basically since GameStop, we moved from a stock market boom to an investing bubble.
We may not know the exact date… But the Melt Down is coming.
The main index of tech stocks – the Nasdaq – hit another record to end last week. From its bottom 47 weeks ago, it’s up 105%. To give you some frame of reference, that is the best 47-week performance in the 50-year history of the index.
The Nasdaq has only been up over 100% after 47 weeks twice in history… The last two 100% moves ended in March 2000 and in July 1983. The stock market performed terribly, immediately after those huge moves higher… Take a look:
The last two times in history that we saw a market up over 100% in the same short period of time as today, the Melt Down was knocking at our door. It’s as simple as that.
So Why Not Just Sell Now?
You might be thinking, “Steve… If all this is true, why even participate? With the Nasdaq up more since its bottom than at any other time, why not just sell now?”
Market commentator Josh Brown explained it best recently in his blog The Reformed Broker. Talking about cryptocurrencies and crazy investing ideas, he said, “That sounds stupid… I’m buying some just in case.”
He continued…
With 6% economic growth, plus zero percent interest rates, plus millions of people sitting around on their phones all day speculating in stupid sh!t on the internet, your regrets will multiply daily, as said stupid sh!t continues to grow…
The Greater Fool Theory is in effect right now. There aren’t many more people left to buy, in my opinion. All we are down to is those new investors putting more and more money to work.
That’s not enough to keep the bull market going forever. But it does mean prices can rise from here.
You never know just how high a boom can go on. As the saying goes, “Markets can remain irrational longer than you can remain solvent.” That goes for booms, too.
And we want to be on board for as much of it as possible… no matter how stupid it gets.
I showed you what happened the last two times the markets looked like this. I wasn’t an investor through the 1983 boom – I was 11 years old then. But I lived through the boom that peaked in March 2000.
It was a crazy time… and the “stupid” gains were piling up. In January 2000, I issued the most serious warning of my career to my 40,000 subscribers. I wrote…
We are at the peak of most likely the greatest financial mania that will ever be seen in our lifetimes, and possibly the greatest ever witnessed…
As long as the mania continues, we’ll continue to hold and even buy the best participating companies… How can we buy stocks when we know it’s reached the mania stage? It’s easy, we have a disciplined system of investing that’s been proven to make money.
In short, we had an exit strategy – just like we will 21 years later.
Here’s how it went down back then… The market peaked in March 2000. Our exit strategy signaled for us to get out of most of our positions in April 2000. At the time, selling our positions because they hit their trailing stops felt like I was failing my readers. Times seemed so good. It felt so wrong to sell!
What Is a “Trailing Stop”?
Buying stocks is easy… It’s knowing when to sell that’s the hard part.
A “trailing stop” sets the stop-loss price (that is, the price at which you should sell) at a fixed percentage amount below the current market price of a stock. It’s called a “trailing” stop because the stop-loss price follows the market price of a stock upward like a trail. So, as the stock’s market price rises, the stop-loss price rises by the trail percentage amount. But if the stock price falls, the stop-loss price doesn’t change, and you sell when the stop price is hit.
A straightforward form of the trailing-stop strategy is a 25% rule. Sell any and all positions at 25% off their highs. For example, if you buy a stock at $50, and it rises to $100, when do you sell it? If it closes below $75 – no matter what.
But in the end, it was by far the right thing to do. I had no idea that the market would keep going down, and down, and down… eventually bottoming – years later – in 2003.
This Melt Down will be brutal too. It could last for years… which means investors are potentially facing years of poor returns. This could be the last chance many of us get to make irrational gains in the U.S. market.
Another thing you must understand is this: There is no foolproof signal for the start of the Melt Down. Stocks start to fall, and people get excited that they can buy more of their favorite names even cheaper.
Most people will be extremely tempted to buy more when stocks start to fall. That is the wrong thing to do.
I realize you are excited about the market… and about the gains you’ve been making. But don’t let that get in the way of your clear thinking.
It’s more important now than ever to have a “cool head” in today’s market.
Dr. Steve Sjuggerud holds an MBA and a PhD in finance. He’s worked as a stockbroker, vice president of a global mutual fund, and a hedge-fund manager. His track record has landed him on various television networks including stints on Fox Business News, Bloomberg’s Taking Stock, and CNBC, among others.
