We are operating with the notion that stocks topped out in 2015 and are now in the early phases of a new bear market (and global recession). In the short term, the action remains very poor on Wall Street. It was another ugly week as the major indices ended lower and several key stocks broke down badly after reporting earnings ($GOOG, $ICE, $LNKD, $DATA, $RL, just to name a few causalities from last week). Stocks snapped a two-week win streak and fell after the latest round of tepid earnings and economic data was released. In bear markets, surprises happen to the downside. If last month’s lows are breached (Jan 20, 2016) we have to expect another “ugly” leg down to follow. So far, the major indices are forming a bearish flag/wedge pattern and that suggests lower prices may follow. We have to keep in mind that global central banks love interfering with markets and have distorted the playing field for years. Any strong intervention may change the playing field and lead to a stronger bounce. Until that occurs, the sellers remain in clear control. The intermediate and long term action remains lousy and we feel it is just a matter of time until the major indices fall 20% from their 2015 highs which officially defines a bear market. Several important areas of the market are already in a bear market (defined by a decline of 20% or more from a recent high) which means it is just a matter of time until the major indices play catch up to the downside. These are some of the important areas that are already in bear market territory: Commodities, The Small Cap Russell 2000 ($IWM), Transports ($IYT), Biotechs ($IBB), Retail ($XRT), Junk Bonds ($JNK), Materials ($XLB), just to name a few.
Monday-Wednesday’s Action: Economic And Earnings Data Continues To Slow
Stocks ended mixed on Monday as oil prices tanked over 6% after a series of weaker-than-expected economic reports were released across the globe. China said it’s official factory gauge fell to a three-year low of 49.4 in January. This was the sixth consecutive monthly decline and missed estimates for 49.6. China’s main stock market, the Shanghai Composite, fell nearly 2%, extending its loss this year to -24%. European data was also weak with the headline Purchasing Managers’ Index falling to 52.3 from 53.2. In the U.S., the data was mixed to less than stellar. Personal income and outlays rose 0.3%, matching estimates. The PMI Manufacturing index came in at 52.4, missing estimates for 52.6. The ISM Manufacturing index sank to 48.2, missing estimates for 48.3. Construction spending came in at 0.1%, also missing estimates for +0.6%. Clearly, economic activity is not healthy.
Stocks fell on Tuesday, led lower by energy, industrial, and material stocks. Financial stocks also fell hard on Tuesday as sellers showed up and continued to relentless sell nearly every sector in the market. Oil prices fell hard on Tuesday and tanked over 11% in the past two trading days alone! That’s a very big decline for a major commodity like oil and tells you everything you need to know about the slowing economy.
Stocks opened lower but closed near their highs as the US dollar fell and oil continued trading like a penny stock, jumping 8% on Wednesday. The weaker dollar helped many commodity areas of the market (gold, silver, oil, etc). Economic news was mixed. ADP, the country’s largest private payroll company, said private employers added 205k new jobs in January, beating estimates for 190k. Elsewhere, more weakness emerged from the service sector of the US economy. The PMI Service index rose to 53.2, missing the Street’s estimate for 53.7. The ISM service index also missed estimates for 55.5, and came in at 53.5.
Stocks opened lower on but closed higher on Thursday as the US dollar continued to fall gold continued to bounce. Oil prices fell and closed lower on Thursday after encountering resistance near January’s high. More stocks gapped down after reporting lousy numbers. Shares of Ralph Lauren plunged over 20% after reporting a disappointing quarter. Shares of GoPro (GPRO) tanked over 7% after the company lowered their 2016 outlook. In Europe, Shares of Credit Suisse ($CS) plunged to the lowest level since 1991 after the bank posted its first full-year loss since 2008. Shares of Deutsche Bank ($DB) also plunged to the lowest level in over a decade and both stocks are trading below their 2008 lows! That’s with the European Central Bank printing billions of dollars every week to stimulate markets and their lackluster economy. Stocks fell hard on Friday after the government said U.S. employers added 151k new jobs in January, missing estimates for 188k. Meanwhile, the unemployment rates (a level the Fed watches) fell to 4.9% which is the lowest level since the financial crisis.
Market Outlook: A Big Top
From where we sit, this aging bull market is over or on its last breath. The last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007. The market is deeply oversold so keep in mind the strongest rallies in history occur during bear markets (a.k.a bull traps). As always, keep your losses small and never argue with the tape. If you want exact entry and exit points in leading stocks, or access more of Adam’s commentary/thoughts on the market – Join FindLeadingStocks.com.