Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.


This Two-Minute Market Move Could Make You Rich

This Two-Minute Market Move Could Make You Rich[Revealed] How to generate instant income from the stock market. Over and over again. At will. This technique is so powerful – and safe – we’re guaranteeing you can use it to generate $1 million (or more) in retirement cash. And we’ll even send you a $1,000 check to kickstart your journey. Go here for details.


This One Big Red Flag Signals a Stock Correction

By John Persinos on August 16, 2017

The stock market’s behavior lately reminds me of the catch phrase of the fictitious mascot of Mad magazine, the gap-toothed Alfred E. Neuman: What, me worry?

A nuclear standoff, domestic political violence, excessive valuations, a chaotic White House — nothing seems to put a lasting damper on the bulls’ party. Not even the frightening spectacle of swastika-waving Nazis killing people in broad daylight on American streets seems to rattle investors.

The North Korean missile crisis did indeed spook traders last Thursday, sending stocks into a tailspin. However, conciliatory words from Pentagon brass have since soothed those anxieties and the markets enjoyed a subsequent relief rally on Monday.

Stock markets closed roughly flat on Tuesday, with the Dow Jones Industrial Average up 0.02% and the S&P 500 down 0.05%. Keeping markets steady was Commerce Department data released on Tuesday showing that U.S. retail sales recorded their biggest increase in seven months in July.

But this could be the calm before the storm. Below, I examine one big red flag that’s pointing to a stock market correction. Ignore this time-proven indicator at your peril. I also provide proactive measures for portfolio protection. The investment game may be getting riskier, but that doesn’t mean you have to sit on the bench.

Meanwhile, in the weeks ahead, investors should assume nothing. As internecine fighting tears apart the ruling Republican party in the nation’s capital, Wall Street’s coveted agenda of tax cuts and fiscal stimulus is suffering collateral damage. As we witnessed last Thursday, any crumb of bad news could send this overvalued market reeling.

Tea Party in DC’s Wonderland…

Exacerbating tensions in Congress is the hard-line stance of Mick Mulvaney, director of the Office of Management and Budget. As a Tea Party fiscal hawk, Mulvaney opposes raising the debt ceiling without draconian budget cuts, which sets up a major fight in Congress when lawmakers return in the fall from their August recess.

The odds of a federal default over the debt ceiling are greater than they’ve ever been, posing great danger to markets.

At the moment, robust corporate earnings are keeping the bull alive. With 91% of S&P 500 companies reporting actual second-quarter results, 73% of them have posted positive earnings per share surprises and 69% have posted positive revenue surprises. For the second quarter, the blended year-over-year earnings growth rate for the S&P 500 is 10.2%.

Nonetheless, operating results still don’t justify these sky-high valuations. Underpinning the upswing in equities has been a syndrome known as “TINA” (There Is No Alternative). That could all change very soon.

Don’t get me wrong: I have no patience with the carnival barkers in our business who predict calamity day in and day out. I prefer to deal in facts, as exemplified by the cyclically adjusted price-to-earnings ratio (CAPE).

The widely respected (and uncannily prescient) Professor Robert Shiller of Yale University invented the CAPE ratio (also known as the Shiller P/E) to provide a deeper context for market valuation.

The CAPE ratio is defined as price divided by the average of 10 years of earnings (moving average), adjusted for inflation. The ratio now exceeds 30.1, which is 81% higher than the historical mean of 16.8.

According to this long-term chart of the CAPE ratio, stocks in the S&P 500 are partying like it’s 1929:

CAPE Fear: Shiller’s P/E Flashes Red

Source: Yale Department of Economics

Shiller won the Nobel Prize for Economics in 2013, so he’s worth heeding. The Shiller P/E is illuminating whereas the traditional P/E is misleading. The key advantage of the Shiller P/E is that it eliminates the fluctuations in the traditional P/E generated by variations in profit margins during business cycles. During economic expansions, companies rack up high margins and earnings; the traditional P/E ratio in turn becomes artificially low. The converse happens during recessions.

The Shiller P/E isn’t the only red flag. By historical precedent, U.S. stocks are long overdue for a bear market. The average bull market since World War II has lasted just 52 months. The current bull market, which started in April 2009, is now more than eight years old.

In the context of today’s uncertainty, you can either flee to safety (and receive dismal returns), do nothing (and get slaughtered), or be proactive and take decisive measures to simultaneously hedge your portfolio and profit.

A few crash-protection measures to consider: pocket profits from your biggest gainers; use stop losses for further stock purchases; avoid glamorous stocks with nosebleed valuations that get fawning coverage on CNBC; invest 5%-10% of your portfolio in precious metals (e.g., gold and silver); raise you portfolio’s cash level to at least 25%; and make sure you’re diversified across sectors and asset classes.

Also increase your hedges allocation to at least 30%. In addition to precious metals, one hedge worth considering is AdvisorShares Ranger Equity Bear ETF (NYSE: HDGE). This exchange-traded fund focuses on U.S. based, mid- and large-cap stocks with low earnings quality, regardless of their brand name or favor on Wall Street. To find these dangerous stocks, HDGE managers scrutinize the income statements to uncover hidden vulnerabilities.

After pinpointing equities with particularly weak fundamentals, the fund shorts them. With net assets of $168.6 million, HDGE loads up on the very stocks that tend to fall the hardest in a correction. Caveat: The fund’s expense ratio is a bit high, at 1.63%.

Regardless, now’s not the time to take fliers on frothy investments. Investors have a tendency to only recognize the red flags of a correction in retrospect, after the damage has been done. Don’t be oblivious, like Mad magazine’s cover boy. Take defensive measures.


You might also enjoy…


12 Stocks Virtually Guaranteed to Go Up in 2018

You may not believe it, but I have a calendar in my hands right now that tells me the exact date and time when a few stock are practically guaranteed to go up. 

Twelve of them, in fact.

And if you were to invest in them following the simple buy and sell instructions found in this calendar…

You could be making $1,181… $11,814…. and as much as $190,916 more than by using a “buy-and-hold” strategy.

And here’s the best part…

I’m giving away a few copies of this calendar to interested investors (First come, first served).

With this calendar, you could get higher profits with less risk.

Click here to get the full story, and to claim your copy.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.

Stock Talk

  1. avatar
    Rick W. Reply August 17, 2017 at 2:02 PM EDT

    How big of a correction are you guys anticipating? Thank you.

    • avatar
      Donald Leake Reply August 20, 2017 at 12:38 AM EDT

      I think a 10-15% correction would be good for the market. We are currently below or at the 50 day moving average for several indices except the DJIA