US stocks are still in a bull market…but you might not know it by looking at your brokerage account.
Large parts of the stock market are down significantly since June. Last Friday, Bloomberg reported that “roughly half the biggest stocks are mired in corrections, down 10 percent or more from their one-year high.”
Yet the bull market is still holding up. The S&P 500 is now up 210% from its 2009 low, and is up 2.1% this year.
This might sound impossible. How can the stock market be up when so many stocks are down?
Because a few very large companies are propping up the market, as Bloomberg explains:
At the moment, five mega-cap stocks, Apple Inc., Amazon.com Inc., Facebook Inc., Google Inc. and Netflix Inc., are holding up the market, with combined gains in 2015 that actually exceed the entire S&P 500.
When most people talk about “the stock market,” they mean the S&P 500 index. This index holds 500 of the largest US stocks.
The S&P is “market cap weighted.” That means the largest companies account for a big portion of the index. A huge company like Apple makes up more of the S&P 500 index than the bottom 100 companies combined. It’s how a few big companies like Apple and Google can have such a large impact on the “stock market” as a whole.
A bull market is generally “healthier” when a lot of stocks are rising. When only a few big stocks are rising, like today, it suggests the market is fragile. Think of it this way: a building is sturdier when a lot of pillars are holding it up. When only a few pillars hold a building up, removing one could make the building fall.
To us, this is another sign that we’re in the later stages of this bull market. Stocks have been in a bull market for 78 months…far longer than the 50-month average for bull markets since World War II. Stocks have also risen 71% more during this bull market than they have during the average bull market since WWII.
This doesn’t mean stocks are going to crash tomorrow. You don’t need to sell all your stocks and hoard cash. But you should use extra caution right now. We recommend using stop losses on your stocks.
A stop loss is a predetermined price at which you’ll sell a stock. Using stop-losses allows you to participate in the gains if the bull market continues. But if the stock market takes a big dive, you’ll be out of your stocks before there’s much damage.
• One sector is really hurting…
Selling picks and shovels to the oil industry is a tough business right now.
Yesterday, the list of stocks hitting new 52-week lows was full of companies in the “oil service” sector. This is the group of businesses that sell drilling services, oil pumps, drilling rigs, and transportation services to the oil industry. We say this is a “picks and shovels” business.
Right now, business is terrible. Oil is down 60% from its 2014 high. Just this month, it hit its lowest point since 2009.
This price collapse has forced exploration and production outfits to slash their budgets. It’s a lot less attractive to drill for oil when it’s $45 per barrel instead of $95.
These spending cuts are crushing oil service revenues.
Schlumberger Ltd.(SLB), Halliburton Co.(HAL), and Baker Hughes (BHI) are the three largest US oil services companies by revenue.…
Last quarter, Schlumberger’s revenues fell by 25%…Halliburton’s second-quarter sales declined 26%…and Baker Hughes’ revenues shrunk by 33%.
Each company’s stock price is hurting as a result. Baker Hughes’ stock price is down 18% over the last year. Schlumberger and Halliburton’s share prices have fallen 24% and 40%, respectively.
Smaller oil service companies are doing even worse. The “new lows” list is full of small oil service companies like Exterran Holdings Inc.(EXH), Helix Energy Solutions Group (HLX), Basic Energy Services Inc.(BAS), C&J Energy Services Ltd. (CJES), and Unit Corporation (UNT). These stocks have lost 70% over the past year, on average.
Like the industry it serves, the oil services business tends to go through huge booms and busts. Get into the booms early and avoid the busts, and you can make great money in oil services. It could take months or years before the next boom occurs, but it’s a good idea to put them on your watch list right now.
• England’s biggest bank sees gold rebounding…
HSBC Holdings (HSBC), the fourth-largest bank in the world, says the price of gold could rise 10% before the year is over. It expects gold to close the year around $1,225/oz. Gold is down 6% so far in 2015.
HSBC thinks higher interest rates will be a tailwind for gold. Many investors think the Federal Reserve will raise rates later this year for the first time since 2006.
HSBC’s claim is somewhat surprising, because conventional wisdom says rising rates are bad for gold. Gold doesn’t generate income. So when interest rates rise, people prefer to own bonds and dividend-paying stocks instead. At least that’s how the thinking goes.
But, as we recently explained, HSBC examined the data and found the opposite to be true. The price of gold actually increased the last four times the Fed raised rates.
• HSBC expects buyers in the developing world to support gold prices…
Gold is one of the best ways for people in the developing world to preserve their wealth. HSBC explains why:
In important gold-consuming nations such as China, India, Indonesia, and Vietnam, as well as other EMs, consumers may have fewer tools at their disposal with which to protect savings and household wealth against rising prices or low or negative real interest rates.
It’s a good point. Emerging countries typically have shaky currencies and volatile stock markets. So people in these countries who want a stable store of wealth turn to gold.
Right now, emerging-market stocks as a group are at their lowest level since October 2011. And emerging market currencies are having their “longest stretch of weekly declines since 2000,” Bloomberg reports.
Louis James, editor of International Speculator, recently noted that gold is reacting to emerging market turmoil like a safe-haven asset should.
…China devalued the yuan, and gold jumped like it had been stung by a bee. More importantly, it reacted like a financial asset. Even more importantly, it reacted like a safe-haven asset should.
And that’s good news for gold investors. It means the laws of economics have not suddenly changed with the new millennium. It means our fundamental investment premises remain sound: gold is money, it’s on sale but that won’t last, and the leverage our gold stocks give us to the next big move should reward us very, very well.
Louis specializes in finding the best mining stocks with the highest upside. He’ll share his favorite moneymaking ideas with readers at the upcoming Casey Research summit in Tucson, Arizona on October 16-18. Louis will share the stage with a long list of impressive speakers, including James Altucher, Marc Faber, and of course, Doug Casey.
We hope to see you in Tucson. If you sign up today, you can still get “early-bird” discount pricing. But you should act now…this steep discount expires soon. Click here to learn more about the Summit.
Chart of the Day
The S&P 500 has gained 2.1% in 2015…thanks to five huge stocks.
We explained earlier that the strong performance of Apple (AAPL), Facebook (FB), Google (GOOG), Amazon (AMZN), and Netflix (NFLX) is holding up the S&P 500.
Today’s chart compares the performance of “The Big Five” to the rest of the S&P 500. As you can see, if you stripped out gains from “The Big Five,” the S&P 500 would be close to flat this year.
Delray Beach, Florida
August 18, 2015
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