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How to Take the Guesswork Out of Investing

By Justin Brill
Saturday, September 12, 2015

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 
The bad news just keeps coming from China...
 
The recent selloff is largely being blamed on fears that the Chinese economy is slowing. From a recent article in the Wall Street Journal...
 
China got another poor picture of its economic health on Tuesday, as an official gauge of manufacturing activity in August slumped to a three-year low, while the usually strong services sector showed new weakness.
 
Meanwhile, private gauges of both manufacturing and services activity also showed a similar pattern of less-than-stellar activity despite government efforts to bolster the economy.
 
Analysts said, however, that some of the weakness could be temporary, as the latest slip in manufacturing may have been aggravated by temporary factory closures aimed at controlling pollution around the nation's capital ahead of celebrations marking the 70th anniversary of the end of World War II.

The Journal noted that it isn't just that China's economy appears to be slowing that has some investors worried. The Chinese government's attempts to intervene also don't seem to be working...
 
"We believe that the clock is ticking toward further negative surprises," Rabobank strategist Michael Every said about the data in a note to clients.
 
He said that policy responses from China aimed at encouraging stability had so far failed.
 
Chinese authorities have been trying to stabilize the domestic stock market since late June, cutting interest rates for the fifth time since November, and pledging to support the market by buying stocks.

 While the latest news from China isn't positive, there is a "silver lining" for U.S. investors.
 
Despite what you might hear from the financial media, the Chinese economy has almost no connection to the U.S economy. Former "permabear" David Rosenberg, chief economist and strategist at wealth management firm Gluskin Sheff, explained in a recent article in Canada's Financial Post...
 
This gets very little attention because the media and Wall Street analysts know full well that bad news always sells better than good news – take this from a former bear.
 
China's economy has a grand 16% correlation with the U.S. economy, knock-on effects and all. In other words, it's insignificant, though there are some sectors such as automotive and scrap steel that are affected.
 
China represents the grand total of 0.7% of U.S. GDP...

Rosenberg compared the worries about China with similar worries about Japan in recent decades...
 
Before China, Japan was the world's second-largest economy from 1968 to 2010. When I started in this business in the mid-1980s, Japan was all we talked about. Go take a look at the movie Black Rain, starring Michael Douglas – we feared them.
 
Japan drove the markets, and that included commodities since they have none of their own (outside of rice) – and, get this, over the past quarter century of its No. 2 GDP status, Japan was in recession nearly 40% of the time.
 
I don't recall that this unleashed recessionary forces globally. Indeed, in a show of just how domestic the U.S. economy and market are, the U.S. was in a bull market and robust economic growth through most of this period.

Rosenberg noted that the U.S. recessions in 1990, 2001, and 2008 had nothing to do with Japan. And he doesn't think the recent turmoil in China will have a significant influence on our economy or markets today.
 
We agree... But there are still plenty of other reasons for caution. Today, we'll share one more...
 
 Our friend Dr. Richard Smith recently sent us a new warning about the market.
 
Regular readers may remember Richard is a mathematics Ph.D. – and former Stansberry Research subscriber – who built the excellent TradeStops trailing stop loss software we often recommend.
 
Richard has been quietly working to transform TradeStops from a simple trailing-stop tracker (which it still does incredibly well) to a full-featured portfolio-management system.
 
 One of the new tools Richard developed is called "smart" trailing stops...
 
The technology behind these stops is proprietary, but understanding how it works is simple...
 
Rather than choosing a 20% or 25% trailing stop for a position (which our research shows is already surprisingly effective), Richard's smart trailing stops factor in the expected volatility – what Richard calls the volatility quotient – of that particular stock. In other words, it helps distinguish normal fluctuations from moves that suggest a real change in trend.

 Richard tracks "smart" indicators for hundreds of stocks and major market indexes. And following the recent selloff, his TradeStops computers are warning that "serious damage has been done." From Richard...
 
Everywhere I look, technical damage has been done – and it's like nothing we've seen since 2008. Here's an update on the dozen or so charts I've been following for the past month.
 
All three U.S. stock market indexes – the Dow Jones Industrials, the Nasdaq 100, and the S&P 500 – have moved beyond their normal volatility ranges for the first time since early 2009.
 
All three indexes have penetrated their smart trailing stops. Additionally, the smart moving averages are also rolling over in all three cases.

In addition to the three major U.S. indexes, Richard says every one of the major sector exchange-traded funds (ETFs) he follows – such as materials, energy, financials, technology, etc. – dropped below their smart trailing stops.
 
 While the recent rally quickly pushed all three indices and most of the sectors back above those levels, Richard notes that this isn't "normal" action...
 
Of course, anything can happen, but I'm increasingly concerned about the damage that has been done and the complacency I'm seeing in the media. I'm personally happy to see my stops getting hit and giving me the opportunity to move some capital to cash.

Like us, Richard believes this is a reason for caution. But he says there are still some good opportunities out there...
 
Not everything is gloom and doom in the markets. Believe it or not, there are many opportunities that are performing well.
 
I've recently put together a list of 300 different equities and ETFs that I monitor with my SSI toolbox (re-entry rule, smart trailing stops, and low-risk zone indicators). The lists covers stocks from the S&P 100, Nasdaq Composite, and a group of about 100 ETFs such as the above sector-focused ETFs. Some equities are still performing incredibly well.

 It's important to keep in mind that these signals aren't necessarily a reason to sell individual stocks. Not all stocks trade similarly to the major market indexes, and as Richard noted, some stocks are still doing well.
 
But it is one more reason to be careful today.
 
 Our advice remains the same: Stay long your "winners," selectively put new money to work in high-conviction opportunities, and consider selling some stocks short to "hedge" your portfolio... But just in case, keep your "catastrophe-prevention plan" in place.
 
 And if you haven't checked out the new TradeStops, we urge you to take a look now. TradeStops makes tracking and following your trailing stops as effortless as possible, but Richard's new features will open a whole new world of investing to you.
 
Not only will his new smart trailing stops tell you when to sell any individual position, but his new "re-entry rule" tool will alert you when it's safe to buy back in to those positions after you sell. You can get all the details on the new TradeStops, right here.
 
Regards,
 
Justin Brill




This Week's Winners
S&P 500 Symbol Change
Teco Energy TE +26.4%
Freeport-McMoRan FCX +11.3%
Transocean RIG +10.8%

Countries Symbol Change
Hong Kong EWH +3.9%
China FXI +3.4%
Ireland IRL +2.8%

Sectors Symbol Change
Biotech PBE +2.9%
Transportation IYT +2.1%
Big Pharma PJP +1.7%

Commodities Change
Cocoa +5.2%
Nickel +4.4%
Corn +4.0%
Date Range:9/3/2015 to 9/10/2015
From The Crux

This Week's Losers
S&P 500 Symbol Change
Marathon Oil MRO -11.2%
CONSOL Energy CNX -7.2%
Williams Companies WMB -6.5%

Countries Symbol Change
Brazil EWZ -4.5%
Turkey TKF -3.6%
Lat.America ILF -3.1%

Sectors Symbol Change
Oil Services PXJ -2.4%
Gold Mining GDX -1.9%
Real Estate IYR -1.5%

Commodities Change
Brent Crude -3.5%
Orange Juice -3.5%
Platinum -2.9%
Date Range:9/3/2015 to 9/10/2015
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