Why now is the safe time to get back in
When do you get back into stocks?
In 1996, Porter Stansberry and I set out to answer this question. Back then, we were just hungry kids in our mid-twenties. The company we started, Stansberry Research, didn’t exist yet. (Who would have listened to two kids anyway?)
We were living together in an efficiency apartment. (The whole place was one room.) He slept on one couch. I slept on another.
We had nothing – literally – except a mission to find out what works in investing, and a desire to share that with our handful of readers. More than once, Porter stayed at work all day, all night, and all day the next day. Why not? There was nothing at “home” for us.
We were young, but not dumb…
Because I started college at 16, I’d already finished my Ph.D. I’d already been the vice president of a global mutual fund in charge of research and trading. I’d also been a broker specializing in international stocks. And my childhood friend Porter was smarter than me for sure. We were willing and capable.
What we learned in that manic period of figuring out what works still guides us today. So what lessons from back then can we apply to today?
Two things are crystal clear to me right now:
1. It’s time to get back into stocks. And…
2. The Melt Up is back.
That’s all you need to know.
I urge you to take advantage of it. Things are happening quickly. After a lumbering decade-plus-long bull market, the landscape has changed. Everything has sped up. Don’t waffle in your decision and miss out.
Publisher’s note: The “Melt Up” is Dr. Steve Sjuggerud’s term for the final push just before the big “Melt Down.” It’s where stocks often have their biggest, most explosive gains.
We started featuring the Melt Up thesis in our inaugural American Consequences magazine in July 2017 in an article titled, “Your Last Bull Market.” Since then the market has soared more than 30%. And many big-name stocks are up far more – for example, market darling Amazon has soared nearly 200%.
Time and time again in the pages of our magazine, Steve has written us articles showing how the long bull market would not reach its ultimate peak until individual investors were “all in” on stocks once again. And today, given the COVID-19 crash and the huge levels of fear in the market, he has an important update on his prediction.
When to Get Back In
When do you get back in after getting out?
This is the most important question to answer today – after we just experienced the fastest bear market in our investing lifetimes.
In 1996, Porter and I tried to figure it out. We read everything we could on the topic… In particular, we focused on what the most successful traders and investors did with their money over the past 100 years.
Long story short, we realized that getting back in had two components:
1. A mathematical one, and
2. An emotional one.
We learned a lot about what the best investors have done throughout history. And we wanted to devise incredibly “dumb” rules for getting back into an investment – rules so simple that it would be obvious if one of us was trying to break them.
Porter is the more emotional of the two of us – which is good. He gets extremely passionate about his ideas. And he’s usually right.
But sometimes, the markets go against us. So when do we get out? And when do we allow ourselves to get back in?
We already had our “sell” rules in place for the first question. We were already using trailing stops to limit our downside risk – even back in 1996.
But once we stopped out of something Porter believed in, he wanted to get back in as soon as we could… because he had the conviction that it would succeed.
We had to set “buy” guidelines to prevent us from emotionally jumping back into what ultimately might be a bad idea. So we settled on two foolproof rules back then:
1. If the stock or investment hits a new high, then you are allowed to get back in. (That doesn’t mean you have to get back in – a new high might be too expensive for your taste.)
2. If No. 1 doesn’t look like it’s going to happen, then you need a “cooling-off period” before you are allowed to buy again.
The first rule takes care of the math. The second rule takes care of the emotions.
For the first one, the principle is straightforward. A new high means that the investment has unequivocally erased its loss. And therefore, whatever caused that loss is likely behind us. That keeps it simple and sensible.
For the second one, think about it like buying a gun. There’s often a three-day “cooling-off period” involved. This way, a person can’t just get emotional, buy a gun, and immediately take the law into his own hands. The three-day period gives him time to come to his senses. It’s probably not scientific – it’s just a measure in place to control emotions.
We set our cooling-off period for investing at six months. So if a beaten-down investment doesn’t hit a new high to erase the past, you then have to wait past the cooling-off period.
These rules are incredibly relevant right at this moment.
COVID-19 came out of nowhere and clobbered the stock market. Nobody saw it coming. And stocks fell into an official bear market faster than we have ever experienced in our investing lifetimes.
The Melt Up was just getting going… Then the global pandemic hit. You can’t know how bad something like that will be, or how far your stocks will fall. So we followed our rules in my financial newsletter True Wealth and sold positions when we hit our stops. This is how we protect our wealth.
Now, based on our 1996 rules, it’s time to get back in.
Last month, the Nasdaq hit 10,000 for the first time in history – an all-time high.
To me, this means that the market has moved beyond COVID-19. It means that the Melt Up can pick up where it left off. And it means that stocks can soar far higher than anyone can imagine.
Most people won’t believe it. Most people don’t understand that the market looks ahead. It has already priced in yesterday and today. The market has assessed the economic threat from COVID-19, and it has moved on.
Don’t get me wrong. I don’t mean that COVID-19 is behind us. I don’t mean that we can’t have a second wave or that there won’t be more struggles ahead. What I mean is that the stock market has already assessed these factors, and it’s not worried.
Don’t get me wrong. I don’t mean that COVID-19 is behind us. I don’t mean that we can’t have a second wave or that there won’t be more struggles ahead. What I mean is that the stock market has already assessed these factors, and it’s not worried.
That means we still have a lot of upside in the stock market.
You see, the market peaks when everyone believes in stocks. But right now, people still have a lot of fears about COVID-19 (which I understand). They don’t believe that stocks can do extremely well despite what’s happening.
You can choose to believe it or not. But the new highs in the Nasdaq tell me that fears about the virus wrecking the economy are now in the rearview mirror.
The market is looking ahead. The market sees record-low interest rates. It sees trillions of dollars in stimulus. And it believes those things are more important to future returns than a potential second wave.
It’s the ideal setup for a Melt Up… the last push before a blow-off top where stocks make their biggest gains. We have a perfect financial environment, with still enough fear out there to leave plenty of upside at the moment.
More than that, one signal is showing us the broad-based strength of the current rally…
A Green Light From Our Bear Market Indicator
Today, history is giving us a clear sign. It comes from one of the most powerful bear market indicators we have. And this indicator is giving the stock market a green light.
Longtime readers will know what I’m talking about. It’s the advance/decline line. This is a simple measure that tells us how many stocks are moving higher versus the number of stocks moving lower.
The technical term for this kind of indicator is “market breadth.” It tells us if, overall, most stocks are moving in the same direction or not.
A healthy market is one with lots of stocks moving higher. We want to see all sectors and company sizes booming… not just the biggest and most important companies in the major indexes.
A healthy market is one with lots of stocks moving higher. We want to see all sectors and company sizes booming… not just the biggest and most important companies in the major indexes.
That’s exactly what the advance/decline line does. While it might sound fancy, it’s an extremely simple indicator. Each day, you take the number of stocks that went up, then subtract the number of stocks that went down that day. Simple. You then add that number to the previous day’s value for a running total.
That makes the advance/decline line a cumulative history of stocks going up or down. And it means that in a healthy market, this line will hit new highs alongside – or even before – the major indexes.
Again, by that measure, this bear market indicator is giving us the green light today.
The S&P 500 hasn’t quite hit new all-time highs. But the advance/decline line – which covers more stocks than the S&P 500 – hit a new high in June… and has continued to rally since.
This is exactly what we want to see. When the advance/decline line is hitting new highs ahead of the market, it means the rally is broad and healthy. It tells us that a bust isn’t likely.
While this indicator didn’t flash a warning ahead of the COVID-19 crash, that was a true black swan event. It wasn’t caused by a crack in the underlying economy or the health of the market.
When those underlying issues are present, the advance/decline line is a perfect and simple way to see the problems with the bull market’s health. It gave plenty of warning ahead of the dot-com bust and the Great Recession crash, for example.
The chart below shows the advance/decline line during the late 1990s. In that case, it peaked years ahead of the overall market.
During the craziest part of the dot-com boom, very few stocks were driving the rally higher.
The advance/decline line peaked in early 1998. And by the stock market peak in 2000, it had fallen to multiyear lows. Again, most stocks were falling… but the biggest and most important stocks were pushing the index higher.
That’s the definition of an unhealthy market. And when you see it in real time, it means a bust is a near certainty.
The same thing happened during the housing bust.
This indicator peaked in mid-2007. And when the market made its final peak a few months later in October, the advance/decline didn’t follow suit.
That was a subtle but powerful tell about the health of the stock market. And we all know what happened next… Stocks crashed more than 50%.
This is an incredibly powerful bear market indicator with an impressive track record. And despite how scary it might seem out there today… it’s giving this new bull market a green light.
It’s possible that we could see a repeat of the black swan crash of February and March. But the first crash happened because the virus took the market by surprise. Now, the market is looking forward. It has digested the fears.
All kinds of stocks are moving higher. The rally is broad and healthy. And that means it can continue higher.
Dr. Steve Sjuggerud predicted the rise of gold in 2003, the top of the dot-com bubble in 2000, and the bottom of the Great Recession in 2009. Now, this former hedge-fund manager says a mania will hit the U.S. stock market any day now… one that’ll take most people by surprise. Don’t get left behind – get the details here.
