It was another wild week on Wall Street as A near term low was put in on Wednesday. The operative word is A, not THE, near term low. I’m calling last week’s low “The Dalio low” because legendary investor Ray Dalio went on TV last Wednesday (the exact low of the week) and said we might be headed for a depression. On Wednesday, the Dow turned higher after plunging 565 points intra-day and has been edging higher since. Interestingly, on September 29, 2015, Carl Icahn, released his doom and gloom video (I agree with his points) and that marked A near term low for stocks. Over the next five weeks, immediately after the video was released, the S&P 500 soared over 13%! That’s a huge move for the S&P 500. At this point, stocks are deeply oversold and way over due to bounce. Until Wednesday’s lows are breached we have to expect the market to bounce (or at the very least move sideways from here). Oil prices also placed A (not THE) new near term low last week which also helped sentiment. Central banks interfered again this week. China injected $50B to stimulate their market and the European Central Banks (ECB) hinted at more easy money in March. Central banks love interfering with markets and have distorted the playing field for years. Stepping back, any near term rallies (or more easy money aside), the market remains in lousy shape 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. From our point of view, stocks topped out in 2015 and we are in the early innings of a new bear market (and a global recession). 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. Finally, if markets can’t bounce from here… Good Night Irene.
Monday-Wednesday’s Action: Stocks Bounce After Dailo Low
U.S., stocks were closed on Monday in observance of the MLK holiday. Stocks traded between positive and negative territory on Tuesday as the S&P 500 retested Aug’s low. Oil negatively reversed and closed down on the day which is not ideal. Overnight, China said its GDP grew by 6.9% for 2015 which was the slowest pace since 1990! Additionally, China said Q4 2015 GDP grew by 6.8% year-over-year which matched estimates. In the U.S., December retail sales grew by 11.1%. Meanwhile, industrial production rose by 5.9%. Both came in below estimates. In other news, The International Monetary Fund (IMF) cut its global economic growth forecast for 2016 on Tuesday. The IMF now believes the global economy will grow by 3.4% in 2016, lower than the last forecast of 3.6%. The fact that the market can’t bounce from these deeply oversold levels continues to show you how weak the market is right now.
At one point, the Dow fell 565 points on Wednesday before reversing around noon and rallying sharply into the close. Oil prices fell to $27/barrel, plunged over 6% and hit a fresh multi-decade low but also bounced and closed off their lows. Japan’s stock market officially entered bear market territory (decline >20% from a recent high) and MSCI all-country world stock market index is also flirting with a bear market as well. In the U.S., the economic data was relatively light. The consumer price index (CPI) fell -0.1%, missing estimates for a reading of 0% which clearly shows that deflation remains more of a threat than inflation right now. A separate report showed that Housing Starts came in at an annualized 1.149 million rate in December for a 2.5% monthly dip while permits came in at 1.232 million for a 3.9% decline. That compares with estimates for 1.200M and 1.217M respectively. Overall, the stock market remains very extended to the downside and is way overdue to bounce in the near term.
Thursday-Friday’s Action: Stocks Bounce From Deeply Oversold Levels
Stocks tried to rally but closed mixed on Thursday after China injected nearly $17B into the system to boost markets and The European Central Bank hinted at more money printing.. Oil prices are trying to stabilize and (so far) are trading above the $30 level. Stocks rallied on Friday as more buyers emerged and oil soared over 7%! Short term rallies aside, the bigger picture still looks very weak for stocks.
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.