It was another down week in markets with the Dow Jones dropping 3.03%, the S&P 500 falling 2.96% and the NASDAQ sliding 4.46%. The MCSI Emerging Markets Index also fell 2.30%. And U.S. futures are suggesting another big down day in the markets today.
Big gainers in your portfolio included Illumina, Inc. (ILMN), up 0.56%, and last week’s Alpha Investor Letter recommendation, Apple Inc. (AAPL), which rose 0.48%.
Well, so far 2016 has been all about markets hitting new lows.
U.S. crude oil has hit its lowest level since 2003 with U.S. futures falling below $28 a barrel. MSCI’s index of Asia-Pacific shares ex Japan sank to lows not seen since late 2011. Japan’s market itself has fallen 20% below last year’s peak, thereby meeting the technical definition of a bear market. Chinese A-shares have fallen 14.83% in 2016 alone. Not a single one of the 47 global stock markets I track is up this year.
With global stock markets off to their worst start in history — and yes, that includes 2008 — it’s no wonder that RBC Capital Markets noted that its polls of investors showed they were more bearish on Wall Street than at any time since mid-1987. That’s the year of the famous stock market crash when Ronald Reagan was still President.
That’s quite a statement, as this period covers the emerging market meltdown of 1998, the dotcom bust and the global financial crisis of 2008.
Frankly, I think these fears are overblown. Investors are throwing out the baby with the bathwater. Yes, commodity prices are slumping and global growth is more anemic than expected. But the financial system isn’t nearly as leveraged as it was in 2008.
What about the months ahead?
History has shown that market sentiment is always darkest before the dawn.
RBS notes that every time investor pessimism reached current levels outside of an economic recession, the market was higher one quarter later by an average of 6.4%.
Other studies by sentimentrader.com suggest strongly that if we do continue to fall, then the fall could be sharp — another 5-10%. Still, over the next six months and longer, stocks have an exceptionally high probability of showing a positive return.
The bottom line?
Strap yourself in for some further market turbulence.
But don’t worry about the world ending today.
It’s already tomorrow in Australia.
Portfolio Update
Berkshire Hathaway (BRK-B) dipped 0.81% over four days of trading in the past week. Reports of Warren Buffett buying into the weakened oil sector continue to surface, confirming that Mr. Buffett likes to buy low. Berkshire Hathaway acquired nearly six million shares ($450 million) of Phillips 66 in early January, bringing his total stake to 13%. This is the sixth-largest position in Mr. Buffett’s portfolio. BRK-B is a HOLD.
Markel Corp. (MKL) was also flat in the past week, giving back just 0.18% as it spent the week trading sideways. Looking at the chart, MKL’s pullback appears to have halted directly on the mighty 200-day moving average (MA) — and for MKL, this is a price level not to be trifled with. MKL last touched down to this level in early 2014 only to go on an 18-month bull run, touch the 200-day MA once again, and move even higher. When the dust clears from the current market correction, this will be one of the first stocks to buy. MKL is a HOLD for now.
Cambria Global Value ETF (GVAL) fell 4.51% over the past week. Even the “cheapest” markets in the world became cheaper in the face of the latest global sell-off. As I have noted, not a single one of the 47 global stock markets I track are up in 2016. GVAL is a HOLD.
Guggenheim S&P 500 Equal Weight ETF (RSP) gave back 3.36%. This equally weighted take on the S&P 500 is down nearly 1% more than the S&P 500 Index (SPX) since the beginning of 2016, likely due to its higher weighting in small caps. When markets finally do turn higher, the opposite should hold true, and RSP should rebound quicker than its market-cap-weighted rival. RSP is a HOLD.
PayPal Holdings (PYPL) pulled back 2.66% in the past week. PayPal will report earnings next week on Jan. 27. Although this relatively new stock has been driven lower by market forces, the outlook for PayPal remains positive among the community of analysts covering the stock. PayPal is an excellent long-term candidate in your Alpha Investor Letter portfolio, and possibly a good takeover candidate, as well. PYPL is a HOLD.
Biotech ETF Market Vectors (BBH) fell 5.75%. The bullish case for biotech remains intact, and BBH casts a diversified net to capture gains from this sector. An increasing population of aging folks, a growing demand for new drugs and growing healthcare costs should keep this sector on the rise. Mergers and acquisitions were also a major factor last year, and this trend should continue as well. BBH is a HOLD.
Illumina Inc. (ILMN) bucked the negative trend last week to move 0.56% higher. Illumina is the global leader in DNA sequencing, and associated technologies, for applications in the life sciences, oncology, reproductive health and agriculture industries — just to name a few. ILMN will report earnings on Feb. 2 after markets close. ILMN is currently trading just under its 50-day MA and is a HOLD.
Apple Inc. (AAPL) rose 0.48% over its first few days in the Alpha Investor Letter portfolio. Goldman Sachs recently released positive commentary regarding future AAPL pricing and set a price target of $155 — a potential 60% jump from yesterday’s close. That’s a huge number. Goldman Sachs further noted that any weakness is likely priced in at this time, making the recent sell-off even more of a positive entry point. AAPL will report earnings on Jan. 26 after markets close. AAPL is a BUY.
Nicholas Vardy
