The Best Buying Opportunity Since 2016 By Justin Brill
 It's becoming a familiar story... In recent months, the broad U.S. markets have rallied prior to each of the Federal Reserve's policy announcements, only to reverse and close sharply lower after. And this time was no exception... After rallying as much as 1.1% Wednesday morning, the S&P 500 closed down more than 1.5% after the Fed's decision. The Dow swung from a gain of more than 300 points to a loss of 350. And the tech-heavy Nasdaq again led the way, closing down more than 2% for the day. For its part, the Fed's announcement was no great surprise... As markets largely expected, officials voted unanimously to raise short-term interest rates another 0.25 percentage points to a range of 2.25%-2.50%. And as several Fed members had hinted at recently, the central bank also signaled that it will likely stop hiking rates sooner than expected next year. As the Wall Street Journal reported... The projections showed 11 of 17 officials expect the Fed will need to raise rates no more than two times next year, compared to seven out of 16 officials in September. Just six officials expect the Fed will need to raise rates three times or more, down from nine officials in September, and six officials believe the Fed may need to raise rates no more than once, up from three officials in September. Officials penciled in one more rate increase in 2020. Their median projection of the neutral interest rate – a level that neither spurs nor slows growth – edged down to 2.75% from 3%. The latest increase leaves the Fed roughly one interest rate move away from that neutral setting. However, as we mentioned, the markets clearly weren't pleased... Perhaps they were expecting an even more "dovish" forecast for next year. Or perhaps they didn't love Fed Chairman Jerome Powell's comments that economic growth and inflation were likely to be slightly weaker than the Fed expected a few months ago. Regardless, the market's reaction reminded us of a comment from famed short-seller Jim Chanos late last week. In an interview with financial-news network CNBC, Chanos questioned the health of both the stock market and the economy if rates – which are still historically low – are already causing problems... "One of the things that worries me is just how fragile we seem to be to small rises in interest rates," Chanos told CNBC's Sarah Eisen. "If I were to tell you that nominal GDP growth recently was 6%, with record low unemployment – and good jobs numbers, good wage numbers – and you say 'Gee! We're having a problem with 3% interest rates,' you'd say that's – you know – what kind of fragility [is] in the system?" Chanos, who spoke from the Yale CEO Summit in New York, referenced the recent rise of the 10-year Treasury note yield above 3%... "In interest rate-sensitive industries, we're talking about what a slowdown they've seen in the last two months in their business," Chanos said. "Something seems to me a little bit off that if, eight or nine years into a recovery, we can't handle a 10-year – which normally trades a full point below nominal GDP – that would be 5%. If rates went to 5 percent, people would probably lose their minds." Of course, Chanos was referring to long-term interest rates rather than the short-term rates the Fed controls. But the sentiment applies... Previous Fed tightening cycles have ended with short-term rates well above 4%. If rates at roughly half those levels are already causing problems for stocks and the economy – again, nearly 10 years into the "recovery" – what kind of recovery was it really? Speaking of stocks and the economy, the recent weakness in financials is another reason we've become more cautious... As our colleagues Ben Morris and Drew McConnell noted recently to their DailyWealth Trader subscribers, this critical sector has gotten absolutely crushed in the recent correction. The S&P Financials Sector Index has now fallen more than 20% from its January high, and it continues to lead the market lower. And here, too, are additional signs of trouble beneath the surface. As news service Reuters reported this week... As U.S. bank stocks tanked this month over fears of an impending recession, industry executives downplayed concerns to colleagues, analysts and journalists, arguing that the economy is in great shape. But looking behind headline numbers showing healthy loan books, problems appear to be cropping up in areas such as home-equity lines of credit, commercial real estate and credit cards, according to federal data reviewed by Reuters. Lenders are also starting to cut relationships with customers who seem too risky... Although delinquency and default rates remain near historic lows, as do industry reserves and charge-offs for bad debt, banks have started to pull back. Like us, Ben and Drew have also become much more cautious recently... In Monday's issue of DailyWealth Trader, they shared some good news – and some bad news – for the broad market. First, the bad. While Ben and Drew aren't big on making stock market predictions, they noted that the recent price action in stocks has been concerning. In particular, they explained that the S&P 500 was getting dangerously close to an important level... The benchmark S&P 500 Index's 200-day moving average (200-DMA) started falling in mid-October. It confirmed the downtrend in mid-November. And the 200-DMA has mostly been falling since then. In the past, this signal has led to weak returns going forward. So that was one warning sign. And the bad news is, the warning signs continue... In late October, we showed you that the S&P 500 has a major "support" level at about 2,580. On Friday, the S&P 500 dropped 1.9% to an eight-month low of 2,600. Back in October, they noted this key support level could provide a major clue to a more serious decline... In short, if stocks could hold above 2,580 and turn higher, it would be a good sign that the worst of the correction was over. On the other hand, if this level failed, it would be a sign that a bigger decline could be in store. Unfortunately, the S&P 500 closed solidly below this level Monday... And the index continued lower throughout the rest of the week. Like us, Ben and Drew believe more downside is now likely. So what's the good news? Fortunately, there's more than one way to define an uptrend. And now that 2,580 has broken, Ben and Drew believe an even stronger area of support could come into play... When an asset touches a trend line three times, it creates a strong support level for that asset. And in the chart below, you can see that a long-term trendline in the S&P 500 goes all the way back to March 2009. This support level is about 21% below the September peak, at 2,320... Of course, by most definitions, a 20%-plus drop is considered a bear market... But the reality is, declines of this size can (and do) occur within larger bull markets. And that's exactly what they believe could happen now: We could see a 21% total decline, followed by another major leg higher in stocks. Now, you may be wondering how this is good news... But as they explained, this scenario could present a tremendous opportunity... if you're prepared. And their advice should sound familiar to regular DailyWealth readers... Limit your trading risk with the tools we use regularly in DWT. Use intelligent position sizing and stop losses. Hedge your bullish positions with strategies like short selling and pairs trading. And trade assets that aren't highly correlated to the broad stock market (like precious metals and currencies). You should also be comfortable with the idea of holding a lot of cash. Cash serves as "dry powder" that lets you take advantage of great opportunities that appear in the future. And great opportunities will appear. If the S&P 500 drops to its long-term uptrend line near 2,320, we'll likely be buyers. It will feel terrible. Folks across the media will be printing "BEAR MARKET" in bold red letters in all the headlines. And it could be the best buying opportunity since early 2016... when stocks soared 57% in less than two years. It may not be the "good news" you were looking for. But that's what the market is telling us today. We suggest you listen. Regards, Justin Brill Editor's note: A lot of folks are getting worried about a bear market in stocks. But DailyWealth editor Steve isn't. In fact, he says nothing has changed about his "Melt Up" thesis. He still expects the bull market to resume and soar to new highs in the year ahead. And right now, you can get access to his most popular research – including his latest investment "script" and his free report detailing exactly when he believes the bull market will end – for just $0.13 per day. Learn more here.
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