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Clearing Up Some Confusion About the 'Melt Up'By
Thursday, August 31, 2017
The "Melt Up" is here my friends...
What this means to me is:
That's my thesis. So how should we trade it? We want to maximize our upside potential during the Melt Up. You know the phrase, "Make hay while the sun is shining"? We want to make money while the opportunity is in front of us.
So I created a Melt Up Millionaire portfolio of nine positions to take advantage of the potential upside. It's a portfolio designed to double in 12 months – if my thesis is right.
We believe these nine holdings could return a weighted average of 100% in the next year. And we expect that when the Melt Up ends, we will be able to exit these positions in time to keep our profits.
Of course, we aren't wearing rose-colored glasses. Any portfolio with the potential to double in 12 months is going to be volatile – extremely volatile. That means it has the potential to lose a heck of a lot of money, too... without a doubt.
I don't want to minimize that idea. So let me say it again:
When I spoke about this last week in our webinar, I tried to stress this idea. I went on in depth about protecting our downside risk with trailing stops. And I tried to make it clear that this is the highest-risk portfolio I have recommended in my career. So I was a bit surprised when I got this e-mail from a new subscriber to our Melt Up Millionaire project:
B.B. actually makes some good points. So let me address them... First, as I said above, the recommendations in the Melt Up Millionaire portfolio are going to be volatile – without a doubt.
The goal is to give you the ability to double your money within 12 months. You're not going to do that with shares of Wal-Mart or Exxon. When the goal is to deliver a 100% return in a year, you have to take on volatility.
I want to stress something here... There's a difference between volatility and risk.
With any portfolio, we can't control volatility. No one can control or predict the day-to-day moves in a single stock. We are purposefully exposing ourselves to that volatility.
However, we can control our risk. We do this with "trailing stops"...
We put 35% trailing stops on each of our positions. That means that the biggest loss that we're risking on any one recommendation is 35%. And that's a trailing stop, which means that the sell price adjusts based on the stock's "high-water mark." In other words, trailing stops actively work to lock in gains and minimize losses.
This way, our downside risk is limited to 35% or less. Meanwhile, our upside potential is 100%-plus. This is great.
Hopefully this helps you see how we could have a large amount of volatility, but we are limiting our downside risk.
Second, B.B. brings up an important point: valuation.
You need to know two things about valuations in the Melt Up:
When we were considering the recommendations for this portfolio, we looked back at previous Melt Ups – and focused on the 1999 dot-com boom. Importantly, the stocks that moved up the most back then were the low-earning, high-potential-growth stories. The key point is that starting from high valuations didn't matter in that Melt Up – the most expensive names at the start were the ones that had gone up the most by the top.
The "value" stocks at that time – stocks like Warren Buffett's Berkshire Hathaway – didn't even participate in the Melt Up. So if you were looking to buy "value" in 1999, and participate in the Melt Up by buying the market stalwart Berkshire Hathaway, your strategy would have failed.
Of course, the expensive high-growth names in 1999 were the ones that lost the most as the bubble burst in 2000. And of course, safe Berkshire Hathaway outperformed in the bust.
That's what we expect to happen again... And we will lock in our gains and exit using trailing stops.
Today, we believe that we are approaching a Melt Up like we saw in 1999. And we want to capture as much of that upside as possible. So we are going after the higher-risk names.
When the bubble bursts, we can start to look for values. But that's not where we are today.
This is the idea behind our Melt Up Millionaire portfolio. If I am wrong about this, we have our trailing stops in place. Our volatility may not be limited, but our downside risk is. If our thesis is right, and the market continues to melt up, we are positioned for maximum profit.
I hope that gives you a better insight into my thinking on my Melt Up thesis, and how to maximize profits if I'm right and minimize losses if I'm wrong.
Thanks for writing in B.B.
Good investing,
Steve
Further Reading:
Regular readers know Steve has been keeping a close eye on the Melt Up. Last month, he shared one simple way to see a dying bull market. And last week, he explained why looking at the market in a different way can tell us that the Melt Up has a long way to run from here. Get the full story here.
Tensions in North Korea have the stock market looking a little wobbly. But is it worth worrying about? See what Steve has to say here: North Korea Versus the 'Melt Up'.
Market NotesANOTHER 'BAD TO LESS BAD' WINNER Today's chart highlights one of our favorite strategies at work...
Longtime readers know Steve Sjuggerud coined the term "bad to less bad trading" years ago. The idea is simple: If you buy assets that have been left for dead, you can make massive profits as the market returns to normal – that is, as things simply get "less bad."
Right now, we can see a "bad to less bad" move in shares of aluminum giant Alcoa (AA). From September 2014 to November 2015, aluminum prices fell more than 30%. Investors gave up on aluminum producers like Alcoa. Shares fell more than 60% from peak to trough.
But aluminum prices have started to recover. And as things have gotten "less bad," AA shares have exploded. They're up more than 75% over the past year, and just hit a new 52-week high. Sentiment is improving in the aluminum sector, but this trend still has a long way to go...
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