Should You Worry About a Potential Market Pullback?

We’ve hardly seen stocks stop to take a breath since the March 2020 bottom. It has been a straight move higher, month after month. That kind of uncontested bull run is creating worry in investors’ minds..

We’ve hardly seen stocks stop to take a breath since the March 2020 bottom. It has been a straight move higher, month after month. That kind of uncontested bull run is creating worry in investors’ minds..


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By Chris Igou, analyst, True Wealth

The S&P 500 is up 73% since bottoming in March 2020.

That’s an incredible gain in less than a year. And even more incredible, that run has happened without a single correction (a fall of 10% or more).

We’ve hardly seen stocks stop to take a breath since the March 2020 bottom. It has been a straight move higher, month after month.

That kind of uncontested bull run is creating worry in investors’ minds. They assume a correction has to come… that we’re due for it. And the bubble behavior we’ve seen recently looks like even more evidence that a fall is coming soon.

That mindset makes sense… Again, stocks have jumped 73% in less than a year without a 10% fall along the way. One’s got to be just around the corner… right?

Maybe. But it’s no sure thing.

Let me explain…


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To answer this question, I wanted to do my own digging. So I took a closer look at similar rallies to decide if today’s bull market is as overstretched as many folks think.

In order to do that, I had to ask two questions…

  • Is a 73% return in the S&P 500 without a correction or bear market normal?
  • How long does a market usually go without seeing a major pullback?

To get the answers, I looked at every S&P 500 rally without a correction since 1950.

It turns out, there were 34 of these “unbroken” rallies in the past 70 years. But what you might not expect is that 10 of those each ran 70% or higher before seeing a 10% pullback.

Said another way, nearly a third of historical rallies were more dramatic than today’s. And the most extreme ones made today’s move look like nothing!

In total, six out of those 10 doubled before seeing a correction. Take a look…

The S&P 500 has gone on several multiyear runs without ever looking back. It even rallied 301% from late 1990 to late 1997 without a 10% fall.

That’s seven years… with no correction at all. Amazing!

Another impressive move happened from early 2003 to late 2007… when the S&P 500 was up 112% without a correction. Even our last bull market had a similar move from 2011 to 2015… with gains of 110%.

So where does today’s rally fit in?

Well, we’re nowhere near these kinds of multiyear moves yet. 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. And that could happen alongside an eventual Melt Up peak in 2021. That doesn’t mean the top will happen tomorrow, though.

Simply put, this is not the time to get twitchy fingers. It’s time to stay long for now, while preparing for tough times ahead.

Are We In a Stock Market Bubble?

The idea that we’re in a stock market bubble is growing in popularity. One way to see this is by looking at how much people are talking about it… or even better, at how many people are searching the term online.

The idea that we’re in a stock market bubble is growing in popularity. One way to see this is by looking at how much people are talking about it… or even better, at how many people are searching the term online.


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By Chris Igou, analyst, True Wealth

I know what you’re thinking…

This can’t go on forever, right? Aren’t all these new traders a sign that the Melt Up is almost over?

It’s true. Lately, we’ve seen hordes of new investors throwing caution to the wind. And they’re signaling that we’re closer to the end than the beginning.

These traders are exactly what we’d expect to see in the late innings of a Melt Up. I want to be clear, though… A frothy market like today’s is what the Melt Up is all about. And while I expect the bull market could end soon, anyone betting on an immediate peak is probably going to miss out.

Let me explain…


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I’m not trying to brush your concerns under the rug. If you’re worrying that a bubble in U.S. stocks is about to pop, you’re not alone…

The idea that we’re in a stock market bubble is growing in popularity. One way to see this is by looking at how much people are talking about it… or even better, at how many people are searching the term online.

Google’s search trends can show us interest in a search term today compared with the past. Recently, we’ve seen more searches for “market bubble” than any other time in the last five years. And it’s not even close. Check it out…

The scale goes from 0 to 100, with 0 indicating no interest in the topic and 100 indicating maximum interest. So the most searches ever would become the 100 mark, and everything else is based off of that.

The reading last month was 100. That’s the highest level on record… dwarfing any number we’ve seen in more than a decade. Said another way, more folks were thinking about a market bubble than any other time recently. It has really worked into the psyche of the typical American investor.

The number has come down in recent weeks. But we’re still at elevated levels compared to history.

Does that mean we need to run for cover in our portfolios? Absolutely not!

Again, we know we’re in the thick of a Melt Up. Bubble behavior proves that the thesis is playing out as expected.

Even more important, the biggest gains happen in the final innings of a Melt Up. Tech stocks rallied more than 100% in the final 12 months of the last Melt Up, during the dot-com era.


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One of the worst things we can do is get out before the biggest gains take place. So while signs of market euphoria may be showing up, that’s normal in today’s environment. In fact, we want to see bubble behavior… because it will lead to our biggest gains.

It’s crucial to be aware of the coming Melt Down. But you can’t flee just yet. You want to ride the wave as long as you can.

Tomorrow, I’ll share a reason why stocks can still go higher from here.

Is a 60/40 Portfolio Good? More Reasons To Rethink

Investors are now rethinking the conventional “60/40” investment portfolio. And it’s time for you to consider a new game plan, too…

Investors are now rethinking the conventional “60/40” investment portfolio. And it’s time for you to consider a new game plan, too…


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By Mike Barrett, analyst, Extreme Value

U.S. economist Peter Bernstein regarded the 60/40 portfolio to be the “center of gravity” between risk and return…

We’re talking about a 60% allocation to stocks and 40% allocation to bonds.

The idea behind the 60/40 portfolio was simple… Stocks would provide investors with capital appreciation, while bonds would offer both income and a hedge against “black swan” events – like a pandemic, for example.

In Bernstein’s day, a 40% bond portfolio did generally provide folks with real diversification (and real income). When stocks swooned, bonds typically rose… and vice versa.

But as the pandemic took hold last February and March, the 60/40 portfolio failed miserably…

Investors expecting their bond holdings to rise were in for a rude awakening. Morningstar reports that core bond strategies actually lost 3% on average during this span.

Now, that doesn’t sound bad compared with 30% losses (or worse) in stocks. But the 3% “average” loss also masked incredible volatility – something you don’t expect with bonds. For instance, the Vanguard Total Bond Market Fund (BND) was down an astounding 13.5% at one point last March.

Investors are now rethinking the conventional “60/40” investment portfolio. And it’s time for you to consider a new game plan, too…


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Rick Rieder, chief investment officer of BlackRock’s $2.4 trillion global fixed-income group and co-manager of the BlackRock Strategic Income Opportunities Portfolio (BASIX), knows that investors can no longer trust the traditional approach. As he recently told Barron’s

If you are holding the same portfolio as two years ago and expect it to do the same, it won’t. You have to restructure how you think about asset allocation, especially fixed income.

Ben Inker, head of asset allocation for prominent money manager GMO, concurs. In the firm’s second-quarter letter to its clients last year, Inker noted that…

All portfolios that include government bonds have both lower expected returns and higher risk than anyone had a right to expect them to have previously.

So with the old playbook becoming obsolete, what should investors do now?

Back in October, living legend Howard Marks published a valuable essay called “Coming Into Focus.” In it, Marks reasoned that the Federal Reserve’s insistence on keeping interest rates near zero for the foreseeable future leaves investors like us with five less-than-ideal options…

  1. Invest as you always have (meaning 40% in bonds) and settle for today’s low returns
  1. Reduce risk in the face of today’s uncertainty and accept even-lower returns
  1. Go to cash at a near-zero return and wait for a better environment
  1. Increase risk in pursuit of higher returns
  1. Put more into special niches and special investment managers

For most investors, settling for lower returns or going entirely to cash – when the Fed has made it abundantly clear that near-zero rates will be the norm for years – simply makes no sense. That means the fourth and fifth items on the list are your only real options today.

In other words, long-term investors need a new portfolio playbook.

My colleague Dan Ferris and I have constructed an ideal replacement for our Extreme Value subscribers. The cornerstone of our strategy is this: You should add exposure to stocks – but only when the risk-reward trade-off is clearly in your favor

Investors are realizing they must now increase their exposure to stocks in order to pursue higher returns. The problem is, that has driven up stock prices – particularly high-quality, widely held names like Amazon (AMZN) and Microsoft (MSFT).

So to stack the odds of success in your favor, you must insist on buying only when the trade-off between risk and reward is clearly in your favor.

In a recent blog post, New York University finance professor Aswath Damodaran published a graphic that perfectly illustrates how we address this challenge in Extreme Value. Notice “the gap” between a company’s intrinsic value and its current share price…

In short, stock prices are driven by investor sentiment. Meanwhile, a company’s intrinsic value is a product of future cash flows. Alternatively, you can think of intrinsic value as the highest expected price a knowledgeable buyer would pay for the entire business.

When investors become euphoric, intrinsic value and share price converge. The gap closes, eliminating what we call the “margin of safety.”

In other words, the share price starts to resemble the highest sales price that the business would command. And in turn, the stock’s potential further upside becomes limited.

The vast majority of stocks today fit into this group, according to our research.

Extreme value occurs when the opposite scenario happens… Pessimism reaches an extreme, causing the gap between intrinsic value and the share price to widen. In turn, the margin of safety expands.

This is when the risk-reward trade-off is most in your favor. That’s because the risk of further downside is limited, while the potential upside is much greater.

To see what I mean, let’s look at a great business we recommended in April as pandemic-related fear raged…

Constellation Brands (STZ) is an alcoholic-beverage giant. Its holdings include the No. 1 imported beer in the U.S. (Corona), the No. 1 sauvignon blanc in the U.S. (Kim Crawford), and the No. 1 imported vodka in the U.S. (Svedka).

The business has an army of loyal consumers, which helps Constellation earn large profits and consistently produce tons of free cash flow.

But as you know, when the pandemic hit, the ensuing shutdowns across the country crushed the restaurant and bar industry. In turn, investors panicked out of Constellation’s stock… It plunged from about $210 per share in February to the low $140s by early April.

More important, as this sell-off played out, the “gap” between Constellation’s intrinsic value and share price became so large that you could drive an oversized 16-wheeler through it


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And while consumers were stuck inside due to COVID-19 restrictions, they didn’t quit drinking… They simply drank at home. Investors overlooked the fact that roughly 85% of Constellation’s business is done “off premise” at places like grocery stores and liquor stores.

In short, the pandemic didn’t hurt Constellation nearly as much as investors expected. And the huge gap between its price and intrinsic value at the time allowed us to help our subscribers profit…

Today, Constellation is once again trading for well over $210 per share. And subscribers who followed our advice in early April are up about 55%.

In a world of near-zero rates, you must shift exposure toward stocks and away from bonds… which increases your portfolio risk. So to sleep well at night, you absolutely need to become attuned to the gap between share price and intrinsic value.

And you should insist on only adding new positions where the odds of success are clearly stacked in your favor.


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Editor’s note: More people are starting to realize the bull market won’t last forever. But Mike and Dan’s Extreme Value readers are in on the perfect stock idea for these times. It’s a company that can succeed if the bull market continues, but will likely do even better in a downturn… Learn why Dan believes it could be his most important recommendation ever – with 1,000% upside over the long term – right here.