How we’ll know when the ‘Melt Up’ is finally ending

From Justin Brill, Editor, Stansberry Digest:

Another debt record has fallen…

A few months back, we showed you that total U.S. household debt had set a new all-time high in the first quarter. As we wrote in the May 18 Digest

According to a new report from the Federal Reserve Bank of New York… household debt rose $149 billion in the first quarter of 2017 to $12.73 trillion. As you can see below, this has officially surpassed the previous all-time record of $12.68 trillion, set just before the financial crisis…

As we noted at the time, household debt includes both mortgage debt and consumer debt. And unlike the run-up to the 2008 financial crisis, this boom isn’t being driven by mortgages. In fact, as you can see in the chart, mortgage debt remains well below its pre-crisis peak.

Instead, consumer debt is leading the way this time…

Americans had borrowed more than $1.443 trillion in student loans and $1.116 trillion in auto loans through the first quarter of the year. Only credit card debt (revolving credit) had failed to set a new all-time high.

But not anymore…

Yesterday, the Federal Reserve released its second-quarter report on consumer credit. And once again, the records have fallen.

Student loans outstanding jumped to another new record of $1.450 trillion. Auto loans jumped to a record $1.131 trillion. And credit card debt has now joined them.

As you can see in the following chart, credit card debt outstanding rose to $1.022 trillion in June, officially surpassing its April 2008 high for the first time…

This trend won’t go on forever. This time is not different. Sooner or later, rising defaults and losses will cause the credit spigot to turn off. Then it’s just a matter of time before boom turns to bust.

But for now, the “party” continues…

‘Things haven’t been this dull for 90 years… ‘

In the meantime, markets have become downright boring.

Regular readers know the stock market’s “fear gauge” – the Volatility Index (or “VIX”) – remains near all-time lows.

Investors are as complacent as they have ever been at any other time in history. And who can blame them? Following the market in recent months has been about as exciting as watching paint dry. But you may not realize just how unusually calm the market has actually been. As the Financial Times reported yesterday…

U.S. markets are at their quietest since 1927, according to Deutsche Bank, with the S&P 500 recording no fewer than 12 successive closes with moves of less than 0.3% in either direction. Things haven’t been this dull for 90 years.

It’s not just stocks, though. Bond-market volatility has all but disappeared, too. As Bloomberg reported on Tuesday…

The markets are alive with the sound of “zzzzzz” as the latest trading session marks yet another record low for volatility gauges.

Bank of America’s MOVE Index, which gauges volatility in the U.S. Treasury market, has tumbled to an unprecedented 46.9 at the close of Monday’s trading session. The move means investors in the world’s largest bond market are shrugging off the potential for price swings…

The ‘Bond God’ warns of higher volatility…

We remain on the lookout for a correction, and believe volatility is likely headed higher soon. But we’re not alone. DoubleLine Capital’s Jeffrey Gundlach – the so-called “Bond God” – apparently agrees.

In an interview with Bloomberg Markets on Monday, Gundlach said he recently bought near-dated put options on the S&P 500 and is convinced volatility is headed higher. “Volatility is about to go up,” he said. “That’s my highest-conviction trade right now.”

Like us however, he’s not turning too bearish just yet. “I don’t see the big drop, unless there’s something out of left field, like some sort of really escalating conflict,” he said.

Are we calling for a ‘Melt Up’… or a correction?

Now, simply mentioning the word “correction” is sure to trigger a flood of angry subscriber e-mails. After all, for months now we’ve been sharing Steve Sjuggerud’s view that a “Melt Up” would push stocks much higher before the bull market ends. How dare we suggest that stocks could move lower now?

So let us be clear: We are NOT turning bearish on stocks today.

Steve’s Melt Up is still in play. But that doesn’t mean we can’t see a correction in the meantime.

Stocks have experienced several short-term pullbacks and corrections since the bull market began in 2009, and we’re long overdue for one today. In fact, as we discussed last week, we could see several more corrections as the Melt Up rolls on.

How we’ll know when the Melt Up is finally ending…

So how can we distinguish between a run-of-the-mill correction and a more significant top? According to Steve, history can offer us some clues. As he explained in his brand-new issue of True Wealth Systems…

Financial history may not repeat – but it does rhyme. So studying what happened in the last great Melt Up gives us excellent clues about what will likely happen next, and what the end of the current Melt Up might look like…

The thing is, bull markets don’t die of old age… What’s important isn’t the patient’s age, it’s the patient’s health.

As Steve noted, there are a handful basic “vital signs” that can tell us a great deal about the market’s health…

If I were your doctor, I would probably know your height, weight, and blood pressure. With that, I could make a lot of informed assumptions about your health.

We can do the same in the markets…

For example, one basic sign of a healthy market is more stocks going up than going down. What if the main stock market index was going up… but more stocks were falling each day than rising? That’s when you start to question the overall health of the market.

This is exactly what was happening at the end of 1999, several months before the last Melt Up peaked. More from Steve…

More and more stocks were faltering, but the outsized performance of a few large stocks drove the S&P 500 Index higher… while the rest of the index had already started to fall.

The chart below shows it. The blue “advance/decline” line is a simple measure… You take the number of stocks that went up in a given day and subtract the number that went down.

If more went up that day, then this line goes up. If more went down, then this line goes down. Take a look…

As Steve explained, in a healthy bull market, as stocks go up, the advance/decline line goes up, too. And that was the case from 1995 through 1998. But that changed in 1998… The broad market was still going up, but beneath the surface, more stocks were falling than rising. This was an early warning sign that the market’s health was failing.

Steve also showed that a similar –though less extreme – divergence appeared before the last major market peak in 2007…

The S&P 500 was hitting new highs. But the advance/decline line was trending down.

Not as many stocks were moving higher as the market peaked. And that was a warning sign for stocks.

But today, the advance/decline line doesn’t look anything like the late 1990s or 2007. The market’s health remains strong. More from Steve…

In recent years, the advance/decline line has mirrored the overall market. When stocks went up, it went up. And when stocks went down, it went down.

That’s how this should work. That’s the sign of a healthy market.

Of course, the advance/decline line is just one way of tracking the market’s vitals. But Steve has identified four other critical measures of market health, and all four are giving the “all clear” today…

We’ve taken Mr. Market’s vitals… And he has passed his physical with flying colors! This won’t last forever. The bull market will end one day. But it won’t die of old age… The indicators we’ve highlighted today should give us warning signs long before a major crash.

Those are the warning signs we’ll be watching for. Those will be signs that the end of the Melt Up is near.

I can’t tell you the date that will happen. But I can tell you with certainty that it’s not happening today… or tomorrow.

You can get instant access to all five of Steve’s market “vital signs” – as well as two brand-new Melt Up recommendations – in the August issue of True Wealth Systems. If you’re not yet a subscriber, click here to learn about a special risk-free offer.

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