Steve's note: This week, we're featuring a three-part series from my colleague Ben Morris. Investors are scared of what will happen when the "Melt Up" ends... They believe it's right around the corner. But history can tell us a lot about how markets behave. And Ben's series perfectly illustrates why you should "make hay while the sun is shining"...
| This Simple Phrase Could Be Costing You Money | | By Ben Morris, editor, DailyWealth Trader | | Monday, November 20, 2017 |
| It's one of the funniest phrases in the markets...
No matter how many times it's proven false, people will always believe...
This time is different.
Our psychology leads us to believe that our opinions are special, that the assets we've chosen to buy are special, and that this moment in time is special.
We often believe that this time we will beat the odds... because we have a gut feeling that this time is different.
But this time is almost never different. Instead, it's a heck of a lot like every other time...
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For example, on July 11, 2016 – the day that the benchmark S&P 500 Index hit a new all-time high for the first time in more than a year – we ran a historical study that looked at similar highs from the past. Our conclusion: "There's a good chance we'll see the stock market rise by 14% over the next 12 months."
At the time, readers found this hard to believe. But 12 months later, the S&P 500 was 13.5% higher.
On September 28, 2016, we ran another study with extremely bullish results. The average one-year return in the past was 14.9%. So we said, "It's time to be more bullish than usual... not bearish."
Three months later, we followed up. The market was on track for the 14.9% gain. But we went further. We said...
| If this signal works out as it has in the past... the S&P 500 could still climb 10.4% in the next nine months. That would put the index at nearly 2,500 by September. |
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Fast-forward to September this year... That month, for the first time, the S&P 500 closed above 2,500.
In each instance above, this time was strikingly similar to the past.
More recently, in mid-August, we ran a study based on the Volatility Index (or "VIX"). The S&P 500 had recently dropped more than 1% on two different days... And lots of folks were turning bearish. But between those two drops, the VIX closed with a reading below 12, signaling low volatility.
Since 1991, the VIX had closed below 12 more than 650 times. And in the one-month periods that followed those sub-12 closes, the worst drawdown in stocks was 5.9%. (A drawdown is the most an asset drops during a given time frame, even if it recovers before the end of that period.)
Drawdowns of 5% or more happened only 1.7% of the time. And 72% of the time, the one-month returns were positive. This made it easy for us to say, "The chances of a [10%] correction are slim."
We did see a small 1.7% drawdown following the VIX's sub-12 close in August. But at the one-month mark, stocks were 1.3% higher.
That "this time" wasn't different, either.
Why do I bring all this up now?
Well for one, the VIX is back below 12 as I write. So everything we said in August is just as true today.
If we believe that this time is similar to the past, there's about a 72% chance that stocks will be higher one month from now (using Friday's closing price)... Meanwhile, there's only about a 1.7% chance that stocks will fall by 5% or more over the next month. And in the month following more than 650 VIX readings below 12, the S&P 500 has never dropped more than 5.9%.
So it's very unlikely that we'll see a 10% correction over the next month... or even a pullback of 5%.
I laugh whenever I hear anyone use the phrase "this time is different." It's common enough. And people even use it with irony, knowing that this time is almost never different. But they believe it anyway.
If you ever find yourself betting that this time is different, think long and hard. Fear may be holding you back... And you may be missing out on a great opportunity. Over the course of your investing career, you could miss out on dozens, or hundreds of them.
That doesn't mean you should be reckless, of course. Always look for good opportunities to hedge your bets. Use stop losses, intelligent position sizing, and asset allocation.
But keep in mind... this time is almost never different.
Good trading,
Ben Morris
Editor's note: No one can predict the markets... But a firm grasp of history goes a long way if you want to make steady profits. In his DailyWealth Trader newsletter, Ben walks you through the shifts and signals we see every day... and uses his research to point out low-risk, high-upside trades. Click here to learn more. |
Further Reading:
"It's easy to panic... and to think this bull market is coming to its end. But history says otherwise," Ben writes. In August, just like we're seeing today, volatility pointed to healthy stocks in the near term. Learn more here: The Chances of a Correction Are Slim. "One of the funny things about bull markets is that they like to take as few people along for the ride as possible," Ben says. If today's "Melt Up" plays out like the late 1990s, you need to prepare for the ride. Read more here: Here's Why I Hope You Miss the Boat... |
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NEW HIGHS OF NOTE LAST WEEK Churchill Downs (CHDN)... horse racing and gambling Wynn Resorts (WYNN)... casinos Live Nation Entertainment (LYV)... concerts World Wrestling Entertainment (WWE)... sports media Planet Fitness (PLNT)... low-cost gyms Estée Lauder (EL)... cosmetics Coca-Cola (KO)... soft drinks Monster Beverage (MNST)... energy drinks Constellation Brands (STZ)... beer and wine Grubhub (GRUB)... on-demand food delivery PayPal (PYPL)... mobile payments Square (SQ)... mobile payments Salesforce.com (CRM)... software for businesses Lam Research (LRCX)... chipmaker equipment Cisco (CSCO)... Internet "plumbing" Verisign (VRSN)... Internet domain provider Amazon (AMZN)... online-retail giant Wal-Mart (WMT)... retail behemoth Dollar General (DG)... discount retailer Five Below (FIVE)... discount retailer D.R. Horton (DHI)... homebuilder PulteGroup (PHM)... homebuilder Home Depot (HD)... home improvement Owens Corning (OC)... roofing and insulation Mohawk Industries (MHK)... carpet, tile, hardwood Honeywell (HON)... manufacturing Consolidated Edison (ED)... utilities Exelon (EXC)... utilities Franco-Nevada (FNV)... precious metals royalties
NEW LOWS OF NOTE LAST WEEK Chipotle Mexican Grill (CMG)... burritos AMC Entertainment (AMC)... movie theaters Viacom (VIAB)... TV stations Houghton Mifflin Harcourt (HMHC)... textbooks, teaching materials Sears Holdings (SHLD)... retail "old guard" Whirlpool (WHR)... appliances |
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| It's time to buy the world's largest food and beverage company... The bull market in stocks is likely to continue... And Dave Eifrig likes this food and beverage giant to take advantage of it... Click here to get immediate access. |
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| Stick It to the Taxman and Avoid the 'Death Tax' | | By Dr. David Eifrig | | Friday, November 17, 2017 |
| | No matter what happens with the death tax, we have a way to shield nearly $11 million from the IRS' death tax right now... |
| | This Precious Metal Could Be a Better Buy Than Gold Right Now | | By Dr. Steve Sjuggerud | | Thursday, November 16, 2017 |
| | My "not yet" on physical gold finally turned into a "NOW" this past January. And I'm still waiting for the right opportunity in gold stocks. But today, I'll share a little twist to the story... |
| | Don't Make This Dangerous Gamble on Complacency | | By Dan Ferris | | Wednesday, November 15, 2017 |
| | One type of trade is destined to ruin investors today. It's a set of arcane assets that are poorly understood by those who claim to have mastered them... |
| | The First Threat to My 'Melt Up' Thesis Is Here | | By Dr. Steve Sjuggerud | | Tuesday, November 14, 2017 |
| | A few months ago, I published five warning signs for the end of the "Melt Up" for paid subscribers to my True Wealth Systems letter... At the time, NONE of them were worth worrying about... The five indicators were "all clear." But today, at least one of them is not... |
| | A Huge 113,000% Rise in Seven Years – And Plenty of Upside Ahead | | By Dr. Steve Sjuggerud | | Monday, November 13, 2017 |
| | About seven years ago, the Japanese government apparently decided to buy up the Japanese stock market. I'm not kidding... |
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