Published January 05, 2016

The Most Important Stock Market Chart Today

U.S. stocks have opened the year with a flop.

Yesterday, the S&P 500 fell 1.5%. The Dow Jones Industrial Average fell 1.6%. At one point, the Dow was down 2.7%, which would have been its worst opening day since 1932.

All 10 sectors in the S&P 500 dropped yesterday. Financial and health stocks were the biggest losers, dropping more than 1.9% each. And 39 stocks hit new 52-week lows yesterday, compared to just three that hit new 52-week highs.

Despite the selloff, U.S. stocks are still “officially” in a bull market. By definition, it takes a 20% decline to kill a bull market. The S&P 500 is just 6% below its all-time high.

•  E.B. Tucker, Editor of The Casey Report, says the bull market ended in late August…

You may recall, the S&P 500 had a mini-crash in late August, falling 11% in just six days. At the time, E.B. Tucker called it the end of the bull market:

We believe the era of asset prices soaring on a wave of easy credit is over. Last month’s major stock market decline is the start of a very tough time for stocks and the economy.

E.B.’s call has been dead on. The U.S. stock market hasn’t hit a new high since July.

•  The S&P 500 lost 0.7% in 2015...

While it was the worst year for U.S. stocks since 2008, a 0.7% decline isn’t all that bad. According to that number, U.S. stocks seem to be doing O.K.

However, we’ve been warning Dispatch readers that the market is weaker than it looks…

➢  In August, we pointed out that a handful of stocks were propping up the market.

➢  In September, we showed that the S&P 500 broke below a key long-term trend line for the first time in four years.

➢  In November and December, we discussed key red flags appearing in the bond market, giving early warnings about danger in the stock market.

If you’ve been reading the Dispatch, you know that large stocks affect the performance of the S&P 500 much more than small stocks. The 10 largest stocks make up 19% of the S&P 500 Index…while the smallest 300 stocks also make up 19% of the index.

In 2015, strong performances from a handful of huge stocks propped up the S&P. Take Google (GOOG) for example. It’s the second-largest company in the S&P 500, making up 2.4% of the index. It rallied 44% in 2015.

Meanwhile, the average S&P 500 stock dropped 4% in 2015.

•  The U.S. stock market is rotting from the inside…

Financial website The Reformed Broker reported on Sunday:

Consider that the equal weight S&P 500 closed -4.11% vs. -0.73% for the cap-weighted version, the worst underperformance of that index since 2007.

Unlike the regular S&P, the equal weight S&P 500 weights all stocks the same. It gives the same weight to Apple (APPL), the largest stock in S&P 500, as it does to clothing retailer Urban Outfitters (URBN), one of the smallest.

When most investors talk about the market, they are referring to the S&P 500 Index. But the equal weight index can give a more complete picture of what’s really happening in the market. That’s why we consider this one of the most important charts in the world right now...

As you can see, the regular S&P and the equal weight S&P moved closely for most of 2015. But in the last couple of months, the equal weight S&P has lagged. The growing gap between the two lines shows that fewer large stocks are propping up the index.

•  The same red flag appeared in 1999…

A handful of hot technology stocks pushed major U.S. indices to record highs…even as most stocks struggled.

By 2000, the S&P 500 peaked then plunged 48% in 32 months. The NASDAQ crashed 78% over the same period.

In a healthy bull market, many stocks “participate” in the rally. Today, only a handful of giant stocks are doing well. And even the leading stocks are struggling lately…

•  All four “FANG” stocks dropped yesterday…

FANG is a nickname for four big, high-flying U.S. stocks that have been propping up the market. It includes Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG).

Netflix was the top-performing stock in the S&P 500 last year. Amazon was the second best. Google was the tenth.

On Monday, all four stocks fell more than the S&P 500. Facebook and Google fell more than 2.3%. Netflix fell 3.9%. Amazon was the worst performing stock in the S&P. It dropped 5.8%, for its worst day since August.

Typically, it’s a bad sign when the leaders of a rally start to stumble.

•  We see far more downside than upside in U.S. stocks today...

To avoid major losses, we suggest you sell any stocks that are expensive or vulnerable to an economic downturn. Instead of putting a large amount of your wealth in stocks, we recommend holding large allocations of cash and physical gold right now.

Holding a significant amount of cash will ensure you can buy stocks next time they’re cheap. And physical gold is wealth insurance. It’s protected wealth through stock market collapses, economic depressions, and full-blown currency crises.

Chart of the Day

Ferrari (RACE) stock has been a bad investment…

In October, Italian carmaker Ferrari held its initial public offering, or IPO. An IPO is when a company sells shares to the public for the first time.

It was one of the most anticipated IPOs of 2015...but it’s been a major flop.

Today’s chart shows Ferrari’s stock price since it went public. Shares have declined 14% in less than three months.

Casey Research founder Doug Casey warned readers not to buy Ferrari stock a few days before the company went public:

Ferrari is going to have an IPO on its stock soon. A smart move on their part; when the ducks are quacking, you should feed them. I wouldn’t touch it if your broker offers you some…

Ferrari stock is still very expensive. It trades at a price to earnings (PE) ratio of 26, more than double the PE ratios of carmakers Ford (F) and General Motors (GM). It’s also 25% higher than the S&P 500’s PE ratio. A high PE ratio means a stock is expensive.

Regards,

Justin Spittler
Delray Beach, Florida
January 05, 2016

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