A blip or a healthy correction?

Friday the markets sold off sharply with the Dow closing off 1.4% at 11823, the S&P 500 down 1.8% at 1276 and the Nasdaq which got hit the hardest closing down 2.5% at 2686. This was after a week where the Dow traded above 12000 a few times but could not hold and the S&P 500 also flirted with the 1300 level before retreating.

Personally I have been anticipating a pullback from a technical perspective, but seemingly it took the Egyptian crisis to be the catalyst for a long overdue correction. Investors and traders can get a little complacent when markets continue to lift week after week such as the current bull market we are in. In fact some participants including the media just assume and want equities to continue to march north uninterrupted. In my humble opinion it is healthy for a bull market to correct and in some instances a 5-10% correction is necessary for a sustainable bull market. If you have a long term investment strategy it is best not to be afraid of corrections but anticipate them, for you should then be able to buy your favorite equities or asset classes at a discount.

Have a healthy and prosperous week.


On the brink…

Dow 12000 and S&P 500 1,300? These 2 major indexes are on the verge of breaking through these key psychological levels and who knows how much further they could go? In my previous blog I eluded to a key technical metric which certain professional traders and investors look to, and that is the RSI indicator. The Relative Strength Index or RSI is a metric that can provide insight as to whether markets or equities are overbought or oversold. The Dow Jones RSI value is now hovering around 80, which is definitely in an overbought mode at least according to the RSI value. However, as we all should know by now equities or indexes can remain overbought or oversold for extended periods of time. Let’s break down the analysis a little further pertaining to the RSI. Some market technicians look for the trend-line to not only breakthrough and cross the 70 level on the RSI chart, they look for a break of the 50 value level before they choose to sell or short. It’s the opposite in an oversold condition in whereas the trader or investor looks for a cross above the 30 level and then a subsequent cross above the 50 value level before they cover their shorts or go long.

For now it seems that these markets are going to continue to extend and expecially as I review the results of the Qualcomm (NasdaqGS: QCOM) earnings after the close in which the company reported record first quarter results while raising fiscal 2011 guidance. This should bode well for the tech sector tomorrow.

Have a good evening.


Technically speaking…

Earnings reporting season is not quite over and corporate earnings can certainly continue to act as a catalyst to the markets behavior and direction, however I want to begin to pay attention to the technical health of the indexes. Let’s take a look at the Dow Jones Industrial Average. It appears that this particular index is becoming overbought. Technicians rely on various technical indicators to get a read on the markets or individual stocks. One of the more popular indicators is the Relative Strength Index or more commonly known as the RSI.

Let’s now analyze the chart of the primary ETF that tracks the Dow, symbol (NYSEArca: DIA). By just looking at the candlestick chart it is easy to see how far the Dow has moved up since early September. Now let’s look at the RSI indicator at the top of the chart. The Dow is trading at a value greater than 70 which historically is an overbought level and technically bearish. Please note that stocks and markets can remain overbought or oversold for extended period of times, but historically speaking when the RSI value is above 70 or below 30, it is technically overbought or oversold. This particular indicator is also very popular with individual equities but please keep in mind this is only one technical indicator and should not be used exclusively as a buy or sell signal. I simply refer to this indicator as my initial read on whether or not a particular index or equity is appearing overbought or oversold. Having said this, the Dow appears to be a bit extended.

Have a healthy and prosperus week.

~George Mahfouz

Mixed bag…

The week started off with a bang with IBM (NYSE: IBM) blowing out their 4th quarter earnings numbers posting an EPS of $4.18 per share compared to an average forecast of $4.08 per share. The week also saw solid earnings out of Apple Inc. (NasdaqGS: AAPL) and Google Inc. (NasdaqGS: GOOG) however, this must of been the case where the earnings were already priced into the stock prices for these particular equities sold off this week and took the Nasdaq down with them.

A mixed bag with the banks as well, on one hand you had JP Morgan Chase & Co (NYSE: JPM) report a very impressive quarter but on the other hand you had Bank of America Corp (NYSE: BAC) reporting a significant loss. So what does all this mean for the markets and where do we go from here? Well to me its seems like we are going to be in very choppy waters over the coming months awaiting the next catalyst(s) to guide the direction of the markets. The Nasdaq appears to be in the first leg of a modest correction and the Dow and S&P 500 continue to be supported by the broader results of this earnings reporting season.

Let’s see what next week has in store and until then have a great weekend.


Dow 12000?

With the Dow finishing up another 1% last week to close near 11800, can the industrials break through 12000 this week? Well, there are three major Dow components reporting their earnings this week: IBM Corp (NYSE: IBM), General Electric Corp (NYSE: GE) and Citigroup (NYSE: C), so indeed this could be the catalyst that places the Dow above 12000. There are other major banks reporting their earnings this week as well such as: Bank of America Corp (NYSE: BAC) and The Bank of New York Mellon Corp (NYSE: BK). If any sector has lagged in this bull run it has been the banking sector. If banks can begin to demonstrate strength and stability, we may be looking at Dow 13000+ and the S&P 500 1300+ by year end. (?)

Interesting development today out of Apple (NasdaqGS: AAPL) ahead of their earnings report tomorrow. There is a report out that Steve Jobs is  taking his second medical leave in as many years to focus on his health. The last time this type of news was circulating and reported, Apple’s stock took a significant hit before recovering. This in fact may be the excuse that investors and traders may use to sell off the markets a bit, and if so, this could create an opportunity that some other investors have been waiting on.

Have a safe and prosperus week.


Tech Titan Intel does not disappoint!

After the bell, Intel (NasdaqGS: INTC) reported a record year and higher than expected earnings with a whopping 4th quarter net income of $3.4 billion or 59 cents per share. The street had been expecting 53 cents a share. What also stands out to me is the company experienced top line growth and also gave a stronger outlook for the current quarter. The 4th quarter earnings were derived from revenues of $11.5 billion compared to $10.57 billion for the year earlier period. In one of my previous blogs at the end of last year, I eluded to the need for top-line growth as one of the key factors for the current market rally to continue. Now I know this is only one company reporting and indeed it’s encouraging to see some top-line growth, however this trend must continue on a much broader scale.

Next week you have got other Tech Titans reporting such as Apple Inc. (NasdaqGS: AAPL) and Google (NasdaqGS: GOOG) along with options expiriation. So I expect a very volatile week ahead and hopefully a very profitable one as well. Good luck to all.


Not too shabby for Alcoa…

The first Dow component reported a solid fourth quarter with earnings coming in at 24 cents per share or a net profit of $258 million. Furthermore, Alcoa Inc. (NYSE: AA) is forecasting that global aluminum demand will grow at 12% in 2011 and the company is also optimistic on the United States. Why I like to view Alcoa as a barometer for the economy is that its business serves customers in many sectors such as automobiles, construction and consumer products just to name a few. Alcoa’s shares are off a bit in the after-hours session however the stock has moved up 50% or so in recent months so no surprise that the common is a little weaker after the report.

The after hours action is something to pay attention to as the reporting season continues. There is a strong possibility that when other companies do come out with their results, profit taking may occur and/or the earnings results may already be priced in (?)

Let’s see how Alcoa closes tomorrow to see if this trend continues. Tech titan Intel Corporation (NasdaqGS: INTC) is due to report their quarterly results on Thursday which should set up the Tech sector.

Have a great week.


Earnings season fast approaching…

Earnings reporting season kicks into high gear next week with Alcoa Inc. (NYSE: AA) reporting after the close on Monday. All eyes and ears will be on what the company has to say regarding the health of the economy from their vantage point and what they forecast for the future. In fact, there are high expectations from the street across the board as to what most companies will be reporting in their results and what their outlooks are.

For me, earnings and outlooks will be a huge catalyst in whether or not equities continue to advance or if we see the correction that the short sellers have been waiting on for months now. My position is to wait to see how earnings play out and what the forecasts truly are before any meaningful investments are made.

Have a great weekend.


Stocks begin the New Year where they left off in 2010 – Up!

Stock indexes rang in the new year with gains across the board. The 3 major indices all posted respectable gains today while reaching multi-year highs. The Dow closed up approximately 93 points, the S&P 500 up 14 points and the Nasdaq posted a gain of +38 points. However, the highlight of the day was the small caps, which notched the highest percentage gain of 1.98% in the S&P Small Cap 600 . In fact, the small caps also led the way last year with gains of over 20% outpacing their maturer brethren.

My goodness! This sounds like a broken record: markets up, gold up, fresh 52 week highs, etc. This bullishness has me a bit concerned here in the short term. Certainly, stocks can remain overbought or for that matter, oversold for extended periods of time. One of the metrics I refer to is the VIX index which acts as a fear gauge. The VIX index is almost at 52 week lows which means that investor sentiment is exceptionally high. The lack of investor fear and complacency could be a catalyst for the market to correct. The last time the VIX index was this low was in April/May 2010 right before we saw a 10% correction in the markets. Now I am not suggesting that this will occur again, however, historically speaking when the fear gauge hangs around these low levels, the markets tend to experience a pullback.

Having said this, if a pullback does indeed occur, this would be very healthy for the market which essentially has gone up in a straight line over the past few months.

Have a very prosperous week.


Happy New Year!

The book is closed on 2010 and what a year it was! The final numbers are in: the Dow Jones Industrials gained 11%, the S&P 500 gained 12.8%, and the Nasdaq gained a whopping 16.9%. Congratulations to all of the bulls out there.

So how will equities fare in 2011? Could there be an encore performance in stocks? In my humble opinion, for the markets to have a repeat performance, we must see the unemployment rate come down significantly. This means corporations must be willing to hire and expand, enabling the consumer to start spending again. These three catalysts are essential for a meaningful economic recovery and to keep the markets appreciating.

Have a great trading and investing new year.