Established in 1957, the S&P 500, also known as the Standard and Poor’s 500 Index, is a capitalization-weighted index of 500 large-cap common stocks. Capitalization-weighted means that the companies with largest stock market capitalization have the greatest impact on the value of the index. The S&P 500 is the second most widely followed stock market index in America after the Dow Jones Industrial Average.
Oil plays a critical role in economic growth as oil is used in a variety of industries. In times of economic growth, oil prices rise. When the economy is soft, or getting soft, oil prices fall as demand for oil wanes.
Over the past two months, oil prices have collapsed for the simple reason that the global economy is getting weak.
The chart below shows the steep sell-off in oil prices that started in mid-June.
What’s interesting to note is that oil prices are falling at a time when we have numerous troubling events in the Middle East and Russia. In normal circumstances, these developments would have caused oil prices to soar.
One more chart I want to show you today (which continues to spell trouble ahead for the global economy) is the Baltic Dry Index (BDI). Since the beginning of the year, this indicator of global economic activity has been collapsing.
Since January, the BDI has fallen 45%. The BDI is an indicator of trade in the global economy; the less trade in the world, the weaker the global economy.
Over the past few months, the chances of the global economy witnessing an economic slowdown have risen significantly.
As I have been writing, the eurozone is in very deep economic trouble again. Japan, the third-biggest hub in the global economy, is begging for growth. And the manufacturing and real estate sectors in the Chinese economy are slowing at a staggering rate.
The continued growth of the global economy is critical for the U.S. economy. In 2012, 46.6% of the S&P 500 … Read More
So the S&P 500 has touched the 2,000 mark.
Will the S&P 500 continue to march to new highs?
Well, my opinion towards the stock market hasn’t changed. I remain skeptical for a variety of reasons, many of which I have shared with my readers over the past few months.
But I have a new concern about the stock market, something that hasn’t been touched on by analysts: trading volume is collapsing.
Please look at the table below. It shows the performance of the S&P 500 and its change in trading volume.
|Year||Performance||Change in Volume|
*Until August 25, 2014
Data source: StockCharts.com, last accessed August 25, 2014
Key stock indices like the S&P 500 (it is the same story for the Dow Jones) are rising as volumes are declining, suggesting buyers’ participation in the stock market advance is very low. For a healthy stock market rally, any technical analyst will tell you that you need rising volume, not declining volume.
It’s Economics 101: rising demand pushes prices higher. In the case of the S&P 500, we have declining demand (low trading volume) and rising prices. Something doesn’t make sense here.
Looking at the economic data, it further suggests key stock indices are stretched. We continue to see the factors that are supposed to drive the U.S. economy to deteriorate.
Just look at the housing market. The number of new homes sold continues to decline. In January, the annual rate of new-home sales in the U.S. was 457,000 units. By July, it was down more than 10% … Read More
Not too long ago, I reported that Italy, the third-biggest economy in the eurozone, had fallen back into recession.
Now Germany’s economy is pulling back. In the second quarter of 2014, the largest economy in the eurozone witnessed a decline in its gross domestic product (GDP)—the first decline in Germany’s GDP since the first quarter of 2013. (Source: Destatis, August 14, 2014.)
And more difficult times could lie ahead…
In August, the ZEW Indicator of Economic Sentiment, a survey that asks analysts and investors where the German economy will go, posted a massive decline. The index collapsed 18.5 points to sit at 8.6 points. This indicator has been declining for eight consecutive months and now sits at its lowest level since December of 2012. (Source: ZEW, August 12, 2014.)
Not only does the ZEW indicator provide an idea about the business cycle in Germany, it also gives us an idea of where the eurozone will go, since Germany is the biggest economic hub in the region.
But there’s more…
France, the second-biggest economy in the eurozone, is also in a precarious position—and a recession may not be too far away for France.
After seeing its GDP grow by only 0.4% in 2013, France’s GDP came in at zero for the first two quarters of 2014. (Source: France’s National Institute of Statistics and Economic Studies, August 14, 2014.)
France’s problems don’t end there. This major eurozone country is experiencing rampant unemployment, which has remained elevated for a very long time.
While I understand North Americans may not be interested in knowing much about the economic slowdown in the eurozone, we … Read More
Biotechnology stocks and the Russell 2000 began rolling over at the beginning of July, followed by transportation stocks at the end of the month.
It’s definitely a signal that the stock market is tired, but after such a strong breakout performance in 2013, the market still hasn’t experienced a material price correction in quite some time.
Second-quarter earnings came in mostly as expected and many blue-chip stocks sold off on good results, while companies backed existing full-year guidance. This happens often, as management teams try to make it easier for the company to “outperform” Street consensus. In a lot of cases, the only reason earnings per share advanced comparatively was increased share repurchases.
But it was mostly a decent earnings season and corporate balance sheets remain strong.
There’s not a lot of action to take in this market. Stocks have gone up tremendously and earnings are playing catch-up with valuations.
A little extra cash isn’t a bad thing with equities at their highs; however, finding good value with the prospect of growth in this market is becoming difficult.
I still think the domestic energy sector has a lot to offer investors, particularly those who are looking for income. Pipelines are a good business to be in as they throw off lots of cash and in many cases, revenues are not tied to the spot price of the underlying commodity.
With speculative fervor now reduced as evidenced by the trading action in biotechnology stocks, initial public offerings (IPOs), and select technology companies, it’s reasonable to expect the next couple of months to be pretty lackluster in terms of trading action. (September … Read More
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