The Weekend Edition is pulled from the daily Stansberry Digest.
Was "Davey Day Trader" right?...
"Stocks only go up," Dave Portnoy, the Barstool Sports founder-turned-pandemic-day-trader, tweeted to his legion of dedicated, mostly millennial followers last summer.
You may remember Steve writing about Portnoy before.
This one man was seemingly turning a legion of sports fans – with no sports to bet on during the global pandemic – into stock-market gamblers instead. As Steve wrote of Portnoy in his October 22 DailyWealth essay...
He bets on whatever is hot, or whatever strikes his fancy. He bets big, wins big, and loses big. And he tells you all about it.
At the time, I got a much-needed chuckle out of Portnoy's "stocks only go up" statement.
Whether you like his schtick or not, Portnoy isn't a dumb guy... And he's as much an entertainer as a businessman. He was turning his dedicated followers' attention back then to gambling with money in stocks, a new line of business for his company.
Unfortunately, though, we know not everyone could sense the irony in Portnoy's "stocks only go up" statement. Instead, they might have taken it entirely at face value...
That's where we found the nugget of valuable truth in Portnoy's claim...
You see, he was reflecting a general public sentiment of the moment.
While it's clearly not a fact, Portnoy was channeling the thoughts of many novice investors – mainly the many new investors and day traders getting their feet wet in the markets through platforms like no-fee brokerage Robinhood.
Think back a few months... we were just coming out of government-mandated lockdowns... the number of unemployed was around 20 million... folks were speculating on if or when a COVID-19 vaccine would be developed... and the economy was in shambles...
And despite all that, stocks were still going up.
So what else is someone new to the investing game supposed to believe? Would anyone entering the markets for the first time at that moment actually believe that stocks go down?
Here's the point...
The "Melt Up," as Steve explained back in October, was back on...
Portnoy and a band of merry traders at home were simply part of the trademark euphoric behavior that Steve has seen before – but not since the dot-com bubble. As Steve wrote...
For the first time in more than 20 years, the general public is buying stocks like they're in a casino. This, my friend, means that the Melt Up is here.
Steve was dead-on...
Today, all of the major indexes are back above their pre-pandemic highs... Since the March 2020 bottom, the benchmark S&P 500 Index is up roughly 70% and the tech-heavy Nasdaq Composite Index is up 91%.
At this point, the pertinent question about U.S. stock prices is a common one...
How long can they keep going up?
"Can" is the key word in that question. It isn't a matter of how long stocks "should" keep going up... or how long they "will" keep going up. It's all about if they "can."
Steve and his research team frequently like to point out that asset prices can go much higher than many folks can possibly imagine... despite whatever the economy might be doing... or what the experts are saying should or will be happening at any point.
We just saw that happen in March, April, May, June, and on and on last year...
Perverse as it may seem, what happens in stocks is often the opposite of what many people – especially new investors flooding into stocks today – think should happen.
Said another way, the U.S. stock market can (and has) peaked well before real economic growth slows down...
And after starting from a lower bottom in 2020 than we see today, and given the rally in U.S. stocks that we've seen over the last 12 months, Steve has warned in recent months that the inevitable "Melt Down" could arrive as soon as later this year... right when many investors least expect it.
About stocks now...
Stocks are overvalued by virtually any measure...
We're still seeing monetary and fiscal stimulus prop up this market like never before – a third round of coronavirus aid was approved earlier this week. And we could continue to live with low short-term interest rates, as dictated by the Federal Reserve, for years to come.
At the same time, the market's "fear gauge" – the CBOE's Volatility Index ("VIX") – briefly dipped to less than 20 last month for the first time in a year. And it has done so again recently. That's significant... If you'll recall, the VIX quickly surged to a record of more than 80 at the height of the COVID-19 pandemic last March. But now, investors seem to be growing more complacent every day.
The signs of "froth" are seemingly everywhere.
An astonishing 85% of U.S. stocks are trading above their 200-day moving averages (200-DMA) today, as measured by the MMTH Index. Remember, the 200-DMA is an indicator of a medium- to long-term trend... So in other words, this indicator shows that the number of individual upward trends are near historic highs. The reading is down a little bit from its 90% number one month ago.
In other words, we're seeing a lot of greedy sentiment today...
But sky-high readings of "market breadth" indicators – which show the number of stocks going up versus down – have traditionally meant two things that cover two different sides of the story...
The first is that we're overdue for a short-term pullback. But the second – and the most important for long-term investors – is that more upside is possible over a longer timeline of months or possibly years...
The fact that 85% of U.S. stocks are in strong uptrends now doesn't define a top clearly on its own. (In fact, the MMTH Index is much better at calling market bottoms.)
That makes sense. Why? Because tops don't happen overnight... they happen over time. In other words, what happened in March wasn't a typical Melt Down.
You see, a Melt Down follows every Melt Up. And during a Melt Down, new investors who may have gotten into the market over the past several months and know nothing else but "stocks always go up" believe the first dips present good buying opportunities... And they end up buying nearly all the way down in some cases – the worst thing to do.
Alternatively, more sophisticated investors see the bigger picture and sell higher – when their stops are hit, for instance. This allows them to take profits and live to see another day...
So where does today's rally fit in?
In the March 5 DailyWealth, analyst Chris Igou said this about the current bull run...
Today's move happens to fall right near the average over the past 70 years... which was a 61% gain.
Sure, we could see a pullback soon. It wouldn't be surprising. But we could also see today's rally go a lot further from here before hitting any kind of record. Stocks could double again, and this still wouldn't be the most extreme example in history!
That's what we could see this year... a continuation of the massive rally that has taken place.
This is something that took me a few years to understand once I started investing...
While stock prices going up (or down) might not "make sense" to a rational thinker, the market doesn't necessarily care what we think about what the government is doing to the U.S. dollar or anything else.
But it does care what everyone thinks at the same time... And right now, a collective group of new investors is helping to push prices higher, and the Fed is pushing people consciously or unconsciously into the market.
Great... but should you go "all in" or "all out" of stocks today?
We don't blame anyone for asking this question right now.
The answer to it is different for everyone, depending on your situation. And many of our editors would argue that it's the wrong question to ask anyway...
The answer – expressed via your portfolio allocation – doesn't have to be so black and white, as much as your emotions might tell you that's what you're supposed to do. The Stansberry's Investment Advisory team put it like this in last month's issue...
It's important to be hedged, and not to chase after risky "get rich quick" stocks.
Now is the time to be careful. Follow your stops. And patiently accumulate shares of great companies as they fall into buy range.
And there's the "do half" way of thinking, too...
If you're frozen on an investment decision, do half – that could be buying or selling – of the amount you're thinking. That way, you'll feel right if the trade works out and not as wrong if it doesn't... And you'll still have half the money to use elsewhere.
Said one more way, stocks can be expensive (and they are) and you might not want to put new money into the U.S. market today at these levels... But prices can also go higher, meaning you might not want to get out of the U.S. stock market completely either.
When you think about all this... you can see why you must have an investing plan.
Most folks don't, and they react based on their emotions. And let's face it... that is what gets us in trouble and – as our founder Porter Stansberry has said before – most of the time tells us to do exactly the wrong thing at the worst possible moment.
So if nothing else, take a moment to reflect on where U.S. stocks are today...
Yes, they're expensive. But yes, they can also go higher.
You want to make sure your portfolio and investment plan align with your goals, timeline, and how much you're willing to risk on both sides of the bubble.
All the best,
Corey McLaughlin
Editor's note: The markets are "frothy" today, and a disciplined investment plan can protect your portfolio. Steve says this simple strategy can keep your emotions out of the equation when the Melt Down starts, giving you the best chance of limiting your losses. Click here to get started.
