The U.S. stock market is rolling over.

In the first week of trading this year, the S&P 500 dropped 6%. It was the index’s worst week since 2011.

Now two weeks into the year, the S&P 500 is down 8.0%. It’s the worst start for U.S. stocks since at least 1927, according to Bloomberg Business.

Today, U.S. investors get a short “time out.” U.S. stock markets are closed because of Martin Luther King, Jr. Day.

•  Global stocks also fell last week…

On Friday, the Shanghai Composite Index dropped 3.6%. Chinese stocks are now down 18% on the year.

The Euro Stoxx 600, which tracks 600 of Europe’s biggest stocks, dropped 2.8% on Friday. The Stoxx 600 is now down 20.6% since setting a record high last April. As of Friday, European stocks are “officially” in a bear market, which happens when a price falls 20% from a prior high.

•  Over half the world is in a bear market…

Bloomberg Business reports:

… [M]ore than $5 trillion has been erased from global equities in the most dismal start to any year on record. At Friday’s close, more than half of the 45 markets tracked by Bloomberg had entered a bear market decline of at least 20 percent from their recent peaks.

Canadian stocks entered a bear market two weeks ago. Chinese stocks have been in a bear market since June. Brazilian stocks have been in a bear market since August. And Japanese stocks are on the verge of a bear market. The Japanese Nikkei 225 index is down 19.7% from its high last June.

•  The S&P 500 is still “technically” in a bull market…

The index is down 12% from the all-time high it hit last May. From that perspective, the U.S. stock market looks OK compared to other markets.

However, the S&P 500 doesn’t tell the whole story of U.S. stocks. Although it’s the most widely watched index on the planet, the S&P 500 only tracks 500 large U.S. stocks.

More than 3,700 stocks trade on the New York Stock Exchange (NYSE). The NYSE has fallen 17.3% from its all-time high set in May 2015. On Friday, an incredible 702 stocks on the NYSE hit 52-week lows.

Regular readers know small stocks have done much worse than large stocks lately. The Russell 2000, an index that tracks 2,000 small U.S. stocks, is in a bear market. It has dropped 22% since June 2015, to its lowest level in more than two years.

•  And the S&P 500 is cracking below the surface…

Although the S&P index is down “only” 12%, more than half of the stocks included in the index are in bear markets. On average, S&P 500 stocks have fallen 24% from recent highs.

How is this possible? The S&P 500 is weighted by company size…larger stocks impact its performance more than smaller stocks. For example, Google (GOOG), the second-largest S&P 500 stock, makes up 2.52% of the index. McDonald’s (MCD), the 36th largest stock, only makes up 0.6%.

Last year, the S&P 500 fell 0.7%. It was the index’s worst year since 2008. However, it would have been much worse if the FANG stocks – Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google – hadn’t done so well.

On average, the FANG stocks climbed 83% last year. These large companies, along with a few others, have been propping up the S&P 500.

•  Now FANG stocks are starting to pull down the S&P 500…

So far this year, all four FANG stocks have dropped more than the S&P 500. Amazon is down 15.6%. Facebook is down 9.3%. Netflix is down 9.0%. And Google is down 8.5%.

In general, it’s a bearish sign when stocks that had been leading the bull market start to roll over.

•  Meanwhile, S&P 500 stocks are still expensive…

The index’s PE ratio is currently 19.81. That’s 27% higher than the S&P’s average PE since 1917 (a higher PE ratio means a stock or index is more expensive).

•  The current bull market in U.S. stocks has run for 83 months…

That’s 31 months longer than the average bull market since World War II.

U.S. stocks have soared during this period. The S&P 500 has gained 178% since March 2009. Since 1932, the average gain for the S&P during a bull market is 136%.

Old age and steep valuations aren’t enough to end a bull market. But they are good reasons to invest with caution. We recommend holding a significant amount of cash right now. This could help you avoid major losses if U.S. stocks continue to fall. At some point, U.S. stocks will be cheap again. When that happens, you’ll want to have cash on hand to buy shares of world-class companies at fire-sale prices.

•  We also recommend owning physical gold…

Dispatch readers know gold is financial wealth insurance. For thousands of years, it’s preserved wealth through every kind of financial disaster imaginable.

The price of gold rose 1.0% during the stock market sell-off on Friday. Gold is now up 2.6% on the year. It’s trading near a two-month high.

If you’re worried U.S. stocks will keep falling, we recommend owning physical gold. As a safe haven asset, gold prices typically rise when stock prices fall.

We also recommend watching this free video. It’s a short presentation to teach Casey readers simple strategies to protect their money in a bear market.

•  Louis James, editor of Casey Resource Investor, says U.S. stocks will keep falling…

In the latest issue of Casey Resource Investor, our advisory dedicated to investing in large resource stocks, Louis wrote,

I see the coming fall of the U.S. stock market as one of the surest bets in the world today.

Louis is shorting U.S. stocks (betting they will fall). Earlier this month, Louis told his readers to buy the Proshares Short S&P 500 ETF (SH). This fund goes up when the S&P 500 goes down. In less than two weeks, Louis’ readers are already up 8.3% on the trade. And the fund is still a BUY, even after its initial jump.

You can learn more about this trade, and other ways Louis is hedging his portfolio, by signing up for a risk-free trial to Casey Resource Investor. Click here to learn more.

Chart of the Day

On Friday, emerging market stocks hit new lows…

Today’s chart shows the performance of MSCI Emerging Markets Index, which tracks stocks in 23 emerging markets.

Last year, the index fell 17% for its worst year since 2011. Over the past two weeks, the index has dropped another 11%. It’s now at its lowest level since 2009. According to Thomson Reuters, Hungary is the only emerging market that’s up this year.

Many emerging market stocks are getting cheap. Yesterday, Bloomberg Business reported that emerging market stocks are trading at a 29% discount to stocks in developed nations.

Eventually, we’ll get an incredible opportunity to buy emerging market stocks at bargain prices. But for now, we recommend staying away. As you can see from the chart, emerging market stocks are in a sharp downtrend. They’re likely to fall further before bottoming out.

We’ll let you know when emerging market stocks begin to carve out a bottom.


Justin Spittler
Delray Beach, Florida
January 18, 2016

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