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Welcome to 2016! Almost three weeks into the New Year and the stock market is acting horribly. The S&P is already down more than 8%. In my opinion, things will continue to get worse. In my last two Client Notes, “Big Trouble” and “The Difference Between Market Tops and Bottoms”, I forecast an emerging bear market. In fact, I believe there is a substantial possibility that we are already in a bear market and that the peak occurred 6 months ago in July 2015.
Consider some of the technical evidence. More than 50% of the S&P 500 is already down more than 20% from all time highs. More than 40% of NYSE traded securities (1395 out of 3225) hit new 52 week lows on Wednesday. Volume on the NYSE has exceeded 5 billion shares in 5 of the last 6 trading days, including more than 6 billion on Wednesday. I can’t remember one 5 billion share day last year.
Second, the railroads are already in a recession. CSX, a $20 billlion market capitalization East Coast railroad operator, reported volume dropping 6% and pricing 7% in the 4th quarter leading to a 13% revenue decline year over year. Union Pacific (UNP), a $60 billion market capitalization railroad operator which dominates the Midwest and West, reported a 9% drop in volume and an almost 8% drop in pricing leading to a more than 15% decline in revenue in the 4th quarter compared to the year ago period. UNP is down more than 40% from its peak a year ago.
Finally, the Fed is in a tough position. Having just raised interest rates for the first time in a decade in December, it will be a process for them to reverse course and start stimulating the markets again. By the time they do, massive damage may already have been done.
Fortunately, we have dodged this entire meltdown since I have been essentially 100% cash for 5 months now.
Founder & CEO
Top Gun Financial (www.topgunfp.com)
A Registered Investment Advisor
Bay Area, CA