Don't Let This 'Warning Shot' Go to Waste

The Weekend Edition is pulled from the daily Stansberry Digest.

It was the question of the night...

A family member was over at our house on Monday, eating our snacks, and said the words that we sometimes hear from him: "Hey, since you're a finance guy..."

I didn't know exactly what he was about to say, but I had a good idea it was about what happened in the markets that day...

"I was down a lot of money, like a lot of money, this morning," he said while nibbling on some Goldfish. "Then, by the end of the day, I was up."

"It was crazy," I said.

"What the heck happened?"

It was a good question.

Monday's market craziness was not normal...

And as I answered my family member, that dawned on me.

It appears that a lot of selling by "retail investors" – meaning do-it-yourselfers – in the first hour of the trading day started a quick tumble that put the tech-heavy Nasdaq Composite Index and benchmark S&P 500 Index down 4%...

I told him what we've been saying here: A lot of people with money in the markets are getting concerned about what the Federal Reserve is going to do next with interest rates and other monetary policies to try to stem inflation.

In any case, things looked really bad for the markets this past Monday morning. Many key trend indicators were broken... suggesting the bottom might be falling out.

But by the afternoon, professional investors – like hedge-fund traders and money managers – had stepped in. They bought enough shares of different stocks to stage a stunning one-day reversal in the indexes and many sectors.

The S&P 500 and Nasdaq each finished the day positive, up 0.28% and 0.63%, respectively, from down more than 4% hours earlier.

It was a truly wild performance, worthy of questioning...

I believed it had to be one of the crazier days the U.S. stock market had ever seen.

As I'll explain today, this turned out to be true – and it was maybe even crazier than you might've thought.

To put it briefly, we either just received a "bear market warning"... or this sell-off could end up being part of a short-term bottom that sets up bigger gains ahead.

We can't know for sure what will happen next. So far, this one wild day has turned out to be a precursor to a volatile week in stocks.

But at the very least, single-day swings like these are so rare that they alone are reason to pause and take a close look at your portfolio... and make sure it's prepared for anything that might come.

Said another way, don't ignore the "warning shot" that Mr. Market just fired.

I say this because Monday's big intraday swing has only happened two other times in market history...

Our Stansberry NewsWire editor C. Scott Garliss shared the numbers with us.

The S&P 500 recovered from an intraday loss of nearly 4% and finished the day positive. This was only the third time it has ever happened...

The other two occurred in October 2008... at the run-up to the worst of the financial crisis. Based on history (and on what we saw over the rest of the week), more losses could happen over the next several months.

But you also might be encouraged by the one-year recovery after these two market days...

The history with the Nasdaq is similar.

As Empire Financial Research founder Whitney Tilson shared in his free daily newsletter on Tuesday...

One of my colleagues sent me this bit of trivia, showing exactly how crazy yesterday was: it was just the sixth time since 1988 (when open/high/low/close data began) that the Nasdaq erased an intraday decline of more than 4% to close higher on the day:

In the previous five cases, covering four time periods (two were only a month apart in late 2008), the market was down one month and three months later in every case except one, but was higher in all but one case a year later. Interesting...

Longtime readers know that many of our editors hate to say "this time is different"...

I'm not about to argue with them. It's wise to just look at what's in front of you.

But I also find it challenging to identify what the "this time" is that we should even be talking about...

The best bet might be to start with October 2008... the only other time the Nasdaq and S&P 500 both behaved like they did this past Monday.

Back then, stocks were already down about 30% from their 2007 highs by that November. But remember, the S&P 500 fell another 25% from there... and the stock market did not hit bottom until March 2009.

This is all to say that the little amount of precedent we have for a historically volatile day like Monday suggests more losses are to come, broadly speaking, for stocks over the next six months... and that a bottom to this sell-off hasn't arrived yet...

At the same time, stocks have been overdue for a "garden variety" 10%-ish correction, too. These happen about every year on average. The issue is, it's impossible to tell right now if this sell-off is one of those... or if a bigger one is still to come.

As Scott wrote in a private note to us...

The signs say the recent sell-off isn't over. Based on past precedent, there's more pain to come before a rebound. But over the next 12 months, we should see solid returns.

It's natural something like this is happening, especially when we're experiencing such a large rotation out of growth and into value.

At the very least, this shows us how much fear is in the market today...

It's natural for people to be afraid of what they don't know.

The Federal Reserve is carrying a $9 trillion balance sheet... And the U.S. government has deposited thousands of dollars directly into eligible Americans' bank accounts to ease the effects of the pandemic.

Inflation is surging at record levels... And now, the Fed is looking to take stimulus out of the economy.

Nobody has seen how this ends up before.

Yet, as we've written before, and as Dr. Steve Sjuggerud shared in a recent issue of his True Wealth Systems newsletter, returns for stocks have been pretty good while rates are rising – which signals a belief in a strong economy ahead – but stocks tend to crash once rate hikes stop.

As Steve wrote...

The start of previous rate-hike frenzies led to gains in the S&P 500... not crashes...

The Fed hiked rates 17 times from June 2004 to mid-2006. Yet the S&P 500 soared over that period... rallying 46% before its peak in 2007.

Stocks climbed even more from 2016 to 2020. The Fed hiked rates for years... But the S&P 500 still rallied nearly 80%.

But if economic growth slows while the Fed is hiking rates (not to mention if inflation persists because of the pandemic), that's a horse of a different color.

At the same time, careful readers also know that Ten Stock Trader editor Greg Diamond has been tracking an "analog" between today's market and that of the dot-com bubble and the 2000 stock market top in the Nasdaq.

As Greg wrote in the January 15 Weekend Edition...

All is not well with the stock market.

If this analog continues, I'm expecting this bull market to end by February or March 2022.

That's a bold prediction, I know. But let me explain further...

This analog has been on point for more than a year now, so there's no reason for me to doubt it. I say it often to my Ten Stock Trader subscribers – be unbiased and let the price action guide you.

Remember, the Nasdaq outperformed the overall market all the way up from the March 2020 bottom as cash was thrown into the system and interest rates were near zero.

It "makes sense" that higher-growth names would sell off first on the way down as the Fed makes dollars a bit stronger... But, as we know, Mr. Market also often doesn't make sense.

To be clear, we're not going to make any declarations about what's going to happen next...

Wiser men than me, like Extreme Value editor Dan Ferris and Retirement Millionaire editor Dr. David "Doc" Eifrig, have written lately to say why it's not very useful to try to predict the future, one way or another.

It's easy to realize why, with the abundance of conflicting evidence and uncertainties we feel today.

I will also say that anyone can find a historical nugget about the markets that might not end up meaning much in a day or week from now.

Financial analysts share them all the time on Twitter and elsewhere. It's wise to be skeptical.

But if you take nothing else away from today, take this...

When we see market swings that have happened "only two other times" in history – and both times were in the depths of a financial crisis and stocks sold off another 25% from there – it tells us it's time to pay attention.

Said another way, what happened yesterday might be a final warning that you want to prepare your portfolio for the unexpected.

Don't waste your time fretting over what's to come... or even when it'll strike. Just prepare.

Manage your risk... Heed your stop losses... Own a diversified portfolio featuring high-quality stocks of capital-efficient companies... And don't get "out over your skis" in any one sector or position.

As we've been saying, 2022 is going to be a volatile year.

All the best,

Corey McLaughlin

Editor's note: In case you missed it... Three of our top editors sat down this week to discuss how to prepare for the unknowns ahead. Steve, Doc, and Director of Research Matt Weinschenk detailed what a "bulletproof" portfolio looks like – and the top move they say you should make with your money now, no matter what's next for the markets. This is the most important investment recommendation you will see from Stansberry Research all year... If you missed this urgent presentation, you can get all the details right here.