By Justin Spittler
I almost fell out of my chair when I read it.
A couple days ago, one of my friends sent me a shocking text message.
All it said was “This should end well.” It included the following picture.
My friend, who’s also an investment analyst, was clearly joking.
There’s no way in hell this ends well.
When CNBC suggests you “just buy everything,” you should turn off the television immediately. Get some fresh air. Forget everything you just heard.
You might even want to call your broker and sell everything.
Well, for starters, the mainstream media doesn’t exactly have the best track record when it comes to this kind of advice.
In 2000, they were telling investors to buy internet stocks right up until the bubble popped. Over the next two years, the average internet stock plunged 78%. Many dot-com darlings went to zero.
The same thing happened in 2007. They were cheerleading U.S. stocks until the market imploded. The S&P 500 went on to fall 57%.
• To be fair, it’s not the mainstream media’s job to give great investment advice…
It’s to tell you what’s happening in the world right now.
Sure, this fills the time. It can even make for great entertainment. But it won’t make you rich.
That’s where we come in.
At Casey Research, we tell you where the markets have been, where they are now, and, most importantly, where they’re headed.
We also pride ourselves on telling investors about opportunities and threats that you won’t hear anywhere else.
That’s what today’s issue is all about. We’re going to show you just how fragile the stock market is right now. By the end of today’s issue, you’ll know exactly why you shouldn’t “just buy everything.”
• U.S. stocks have basically gone straight up for the last four months…
The S&P 500 is up 11% since Election Day. The Dow Jones Industrial Average is up 12%.
Now, we get it—investors are excited about Donald Trump.
Unlike Obama, Trump brings a wealth of business experience to the White House. He’s managed a global business empire. He’s created thousands of jobs.
Investors are hoping Trump will use his business expertise to help the economy.
But let’s be realistic. Trump won’t fix the economy overnight. It’s going to take a long time.
Many investors don’t seem to understand this. They’re acting like nothing can go wrong.
• As of yesterday, the Dow has gone up 10 days in a row…
That’s its longest winning streak since 1987.
Now, you don’t have to be a scholar of finance to know why this makes us nervous.
On October 19, 1987, the stock market had its infamous “Black Monday.” That day, the Dow plummeted 22%. That’s the most U.S. stocks have ever fallen in a single day.
Now, we’re not saying the Dow’s going to crash like that again. But we wouldn’t be surprised if U.S. stocks soon fall 5% or more in a single day.
• We know this sounds like a bold call…
But think about it.
U.S. stocks have basically gone straight up for the last few months. This almost never happens.
During bull markets, it’s normal for stocks to have an occasional down day. But the S&P 500 hasn’t fallen 1% or more in a day since October. That alone should make you nervous.
• We’re not the only ones worried about U.S. stocks, either…
David Rosenberg also thinks stocks could soon change direction.
Rosenberg is one of today’s top economists.
But unlike most economists, he doesn’t work for the government or some think tank. He’s the chief economist and strategist at Gluskin Sheff + Associates, one of Canada’s biggest money managers.
In other words, he actually makes people money. He’s worth listening to.
According to Rosenberg, it’s not a question of whether stocks will fall. It’s a question of “timing and magnitude.”
• Rosenberg sees red flags everywhere…
In a recent research note, Rosenberg gave 10 reasons to be cautious about U.S. stocks.
There’s a lot to unpack there, so here’s the key takeaways:
Investors are euphoric. This might seem like a reason to buy stocks. But every great investor knows that you shouldn’t buy when everyone is. You should wait until everyone’s selling. That’s how you get the best prices.
Traders have gone “all in” on stocks. They’re buying far fewer puts than calls. A put is a bet that stocks will fall. A call is a bet that stocks will go higher. A low put/call ratio, like we have today, means most traders are betting that stocks will rise. It’s a sign that traders have become very greedy.
Stocks have risen too much, too quickly. Yesterday, the S&P 500 closed at 20,810. That’s higher than where most Wall Street analysts project the S&P 500 will end this year. From a technical perspective, U.S. stocks are now very “overbought.” This means we could soon see a pullback.
Stocks are very expensive. This one is self-explanatory, and there are many ways to prove this. The thing you need to understand is that expensive stocks crash harder than cheap stocks.
Volatility is extremely low. And stocks often make big moves after long periods of quiet trading. Given all the stock market’s other problems, a pullback now seems much more likely than a breakout.
• The U.S. stock market is incredibly dangerous…
Most investors don’t realize this.
They’re buying stocks without considering the risks. They’re gambling with their life savings.
Don’t make the same mistake. Here are three easy ways you can protect your wealth today:
Sell your weakest positions. Start with your most expensive stocks. From there, get rid of companies with weak balance sheets. If the market runs into serious problems, companies with a lot of debt and little cash will be put to the test.
Don’t overpay for stocks. At this point, it’s only a matter of time before U.S. stocks fall. This means we could get much better buying opportunities in the near future.
Own physical gold. This is one of the simplest ways to protect your wealth from catastrophic losses. After all, gold’s the ultimate safe-haven asset. It can rise while everything else is falling.
Chart of the Day: Avoid Junk Bonds
Junk bonds could be a trap, too.
Today’s chart shows the performance of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). This ETF invests in “junk bonds.” These are bonds issued by companies with bad credit. Because they’re risky, junk bonds pay higher yields than bonds issued by companies with good credit.
You can see that HYG has been on a tear lately. It’s up 12% since last February. It’s now trading at the highest level since July 2015.
You might find this odd. After all, we’ve spent the last few months telling you the bond market is unraveling.
But here’s the thing. Junk bonds aren’t like most bonds. They act more like stocks because of their risky nature.
Don’t forget this.
If stocks tank, investors won’t “take cover” in junk bonds like they might with safe bonds. Instead, they’ll sell junk bonds as fast as they can.
If you’re nervous about stocks, you should avoid junk bonds, too.
Delray Beach, Florida
February 24, 2017
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