Published on August 31 2015

Did Last Week’s Selloff Kill the Bull Market?

US stocks had a wild ride last week…

Early in the week, the S&P 500 entered its first correction in nearly four years (A correction is when an index falls 10% or more from its high). In total, it plunged 11% in 6 days, wiping out $2.2 trillion in value from US stocks.

Then on Wednesday, the stock market did an about-face. After hitting a low of 1,868, it spiked 6.5% to end the week.

•  But investors don’t trust that the selloff is over…

Fear in the stock market is still running high.

The CBOE Volatility Index (VIX), a popular measure of investor fear, is still flashing red. It closed Monday at 27.95, 64% higher than its average since August 2011, when the S&P 500 had its last correction.

Despite this fear, US stocks are technically still in an uptrend. Last week’s selloff of 11% wasn’t enough to end the current bull market. It takes a decline of at least 20% to officially kill a bull market.

At 78 months old, this bull market is one of the longest in US history. Since World War II, bull markets in US stocks have lasted 50 months on average.

Big volatility like we saw last week often signals a change in trend. So we count last week’s selloff as another piece of evidence that this bull market is close to an end.

However, no one can know for sure where the stock market will go. We recommend taking a cautious stance. You don’t need to sell all your stocks…but you shouldn’t expect the broad stock market to continue delivering the big returns that it did in 2012 (+16%), 2013 (+32%), and 2014 (+14%), either.

We strongly recommend using stop losses on all stocks. A stop loss is a preset price at which you plan to sell. If a stock hits that price, you sell. This lets you own stocks that are rising while also limiting your risk if markets crash.

•  Speaking of volatility, oil just skyrocketed…

Oil hit a six-year low last Monday. Then it soared…

Oil gained an incredible 10% on Thursday, then jumped another 7% on Friday. It was oil’s biggest two-day gain since 2009. Reuters reports it was oil’s second-largest two-day gain in 25 years.

And as we write on Monday afternoon, oil is up another 6%.

But this rally doesn’t mean oil’s troubles are over…

Regular readers know oil is in a severe bear market. Last summer, the price of oil topped $106/barrel. By Monday, it had fallen to $38. That’s a 64% loss in about one year.

The Wall Street Journal suspects that the current rally has nothing to do with fundamentals.

Traders and analysts at hedge funds, banks and brokerages said supply-and-demand conditions in the oil market remained weak and there appeared to be little fundamental justification for such a strong rally, or expectations of more price gains in the near future. Rather, they said, it appeared to be set off as investors with so-called short positions that profit from falling prices closed those bets out as the market turned against them.

•  We agree that this rally doesn’t mean the oil market has turned around…

Like most commodities, the price of oil is cyclical. It goes through big booms and busts. And right now, it’s going through a big bust that could last for months or even years.

The chart below shows the price of oil over the past year. The blue line is the price of oil, and the red line is oil’s 200-day moving average (the average price over the last 200 trading days). Professional traders consider it a bearish sign when an asset is below its 200-day moving average, and a bullish sign when it’s above its 200-day moving average.

As you can see, even after the big rally, oil is still way below its 200-day moving average.

The fundamental case also remains bearish for oil. We’ve covered the fundamentals in past dispatches, but here’s a quick summary…

China, the world’s second-largest oil consumer, is growing at the slowest pace since 1990…

Worldwide oil production is still near all-time highs…

And the global oil supply is at its highest level in 17 years.

Eventually, this bust will turn into another boom. But we don’t expect that to happen for a while.

•  A famous “corporate raider” just bought a huge stake in a struggling mining company…

Carl Icahn earned a reputation as a feared corporate raider during the 1980s.

Icahn’s investing style is to buy a large stake in a struggling company…get a seat on its board…and try to make changes to the business that will benefit shareholders. It’s called “activist investing,” and it’s made Icahn one of the richest people on the planet.

Management teams generally aren’t happy when Icahn buys into their company. He can get them fired or drastically cut their salaries.

But if you’re an investor in one of these struggling companies, Icahn’s aggressive style can make that business better…and you richer.

That could happen soon to Freeport-McMoRan (FCX)…

On Thursday, we found out that Icahn now owns 8.5% of Freeport, the world’s second-largest copper producer. His stake is worth over $900 million.

Business has been tough for Freeport. The price of copper is down 27% over the past year. It’s trading at a six-year low. After Wednesday’s close, Freeport’s shares were down about 90% from their 2010 all-time high.

According to Forbes, Icahn “began buying Freeport shares in late July ahead of an over 50% drop in the company’s stock price and added to his stake in recent trading days.”

Bloomberg Business reports that Icahn might just be getting started:

Icahn’s investing firm filed a Hart-Scott-Rodino Act notice about a week ago, alerting regulators and Freeport that he intended to buy as much as 25 percent of the company, said two people familiar with the notice who asked not to be identified discussing non-public information.

Freeport shares jumped 29% on Thursday, before news of Icahn’s stake became public.

Chart of the Day

Commodities are “on sale.”

Last week, the price of sugar hit a seven-year low…prices for aluminum and silver haven’t been this weak since 2009…and the price of natural gas is 35% lower than it was last summer.

The Bloomberg Commodity Index, which tracks 22 different commodities, is at its lowest level since August 1999.

Commodities aren’t just cheap compared to their historical prices. They’re also cheap compared to stocks…

The chart below shows the ratio of the Bloomberg Commodity Index to the S&P 500. The lower the ratio, the cheaper commodities are compared to stocks.

As you can see, commodities haven’t been cheaper compared to stocks since at least 1991…when the Bloomberg Commodity Index was started.


Justin Spittler
Delray Beach, Florida
August 31, 2015

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