Are we in a bear market?

As you likely know, U.S. stocks have been in a bull market for nearly seven years. Since bottoming in 2009, the S&P has rallied 184%. At 83 months and counting, this is now the fourth-longest bull market in U.S. stocks since 1900.

But, recently, the rally has stalled. The S&P 500 lost 0.7% last year. Although that’s a small drop, it was the S&P’s worst year since 2008, when the global economy was in a financial crisis.

This year, U.S. stocks are off to their worst start in history. Just five trading days into 2016, the S&P 500 is down 6.0% and the Dow is down 6.2%.

The S&P 500 is now down 9% from its previous high. By this measure, it’s still technically in a bull market. A bull market “officially” ends when it drops 20% from a previous high.

•  However, Dispatch readers know that, on average, stocks in the S&P 500 are already in a bear market…

S&P 500 stocks are down 20% on average from their 52-week highs. And yesterday, 444 stocks on the New York Stock Exchange fell to new 52-week lows. Only three stocks hit 52-week highs.

When most investors talk about “the market,” they’re referring to the S&P 500. Right now, the S&P 500 is pointing to trouble in the market. But this doesn’t reflect how ugly things really are below the surface. That’s because a few large stocks, which impact the index more than small stocks, have been propping it up.

•  E.B. Tucker, editor of The Casey Report, says the bull market died last summer…

In late August, the S&P 500 fell 11% in just six days. It was the index’s first 10% correction in four years.

U.S. stocks rebounded over the following weeks. At that point, many mainstream analysts said this mini-crash was just a hiccup. E.B., on the other hand, called the end of the bull market in the September issue of The Casey Report.

The market has recovered in the past two weeks. But we think it’s only temporary. In other words, we’re in the middle of a “dead cat bounce.” It’s looking a lot like 2007.

It looks like E.B.’s call was spot-on. The S&P 500 has gone nowhere over the past four months. Now it’s off to its worst new-year start ever.

•  Meanwhile, the largest U.S. department store reported horrible holiday sales…

Sales for Macy’s (M) fell 4.7% in November and December. It was the company’s worst holiday shopping season since 2008. This is a bad sign because holiday retail sales say a lot about the financial health of U.S. consumers.

Still, Macy’s CEO blamed the sales drop on the weather. He claims the unusually warm winter hurt sales of coats, sweaters, and scarves.

Macy’s has reported a string of bad news lately. Its revenues declined for the past three quarters. Its third-quarter sales were 5.2% lower than the previous year. And Macy’s stock plunged 47% in 2015.

•  This week, Macy’s announced plans to close 5% of its stores…

The retail giant will close 40 of its 770 stores by the spring. It also plans to lay off up to 4,500 workers. Management hopes the cuts will save the company about $400 million every year. These drastic spending cuts suggest management doesn’t expect business to improve anytime soon.

Gap Inc. (GPS) also shared poor holiday results. December sales were 5% lower than last year. The company also plans to close 175 U.S. stores early this year.

•  The huge rally in retail stocks is over…

From March 2009 through December 2014, SPDR S&P Retail ETF (XRT), the largest U.S. retail ETF, surged 462%. That’s more than double the S&P 500’s 204% gain.

Then, last year, the rally in retail stocks began to peter out. XRT fell 9% in 2015. In November, it also broke a long-term trend line.

A long-term trend line shows the general direction a price is moving. Many professional traders consider them “lines in the sand.” When an ETF, like XRT, breaks its trend line, it may signal the end of a long-term trend.

The chart below shows how XRT has continued to fall since it broke its long-term trend line in November.

•  We recommend avoiding high-flying retail stocks right now…

When the next economic crisis hits, consumers will spend less on video games, designer jeans, scented candles, and other “wants.” This shift in spending habits will hit major retailers hard.

•  Switching gears, gold mining stocks are starting the year off strong…

Market Vectors Gold Miners ETF (GDX), which tracks the performance of major gold miners, is up 8.5% through Thursday.

Yesterday, Bloomberg Business reported that FTSE/JSE Africa Gold Mining Index is already up 20% this year. This index tracks the performance of South African gold miners. It’s having its best new-year start since 1995.

Dispatch readers know gold miners are leveraged to the price of gold. When the price of gold jumps, shares of gold miners can jump two or three times higher, sometimes even more.

Gold miners are racing higher because gold is up. Yesterday, gold hit a two-month high.

Gold is a “safe haven” asset. It’s preserved wealth for thousands of years, through every economic disaster imaginable. Right now, investors are buying gold because they’re nervous. That’s why gold stocks are surging.

Chart of the Day

Yesterday, Canadian stocks entered a bear market…

Today’s chart shows the performance of the Toronto Stock Exchange (TSX). Yesterday, TSX fell 2.2%. It was the seventh day in a row that Canadian stocks fell.

TSX is now 20% below the all-time high it set in September 2014. As we mentioned, an index enters a bear market when it falls 20% from a previous high…

Canada is the world’s fifth-largest oil producer. Crude oil makes up 18% of its exports. It’s by far the country’s largest export.

Yesterday, the price of oil hit its lowest level since February 2004. Oil has now plunged 69% since June 2014.

Weak oil prices first sent shares of Canadian energy companies tumbling in June 2014. Now, they’re pulling down the entire Canadian stock market.

Regards,

Justin Spittler
Delray Beach, Florida
January 08, 2016

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