Month: August 2012

Stocks lower on the week…

Posted on by George Mahfouz

Despite a rally on Friday, the benchmark indexes finished the week in the red. The Dow Jones Industrial Average (chart) fell 0.88%, the Nasdaq (chart) -0.22%, the S&P 500 (chart) -0.50% and the Russell 2000 (chart) -1.31%. The market action this week broke a six week stretch of gains.

What helped fuel the market on Friday was Ben Bernanke’s comment in a letter that the Fed has more room to add yet even more stimulus if the economy needs it. Is it me or are we all a little exhausted by the same regurgitation of the Fed coming to the rescue of the economy and the markets? What’s clear is investors are are seemingly and exclusively looking to invest in stocks and bonds based on what the central banks will or will not do. To me this platform has now become overkill and I am going to be very cautious on the long side of things going forward. That said, if you have been short the market based on economic and corporate fundamentals, theoretically you have been on the right side of the trade, however, chances are your short thesis has hurt your portfolio because of the accommodative banking policies from around the world.

In my humble opinion this cannot go on forever and I certainly do not want to be long the market when the policymakers say “that’s enough!” Good luck to all.

Have a great weekend 🙂

~George

Let’s talk technicals…

Posted on by George Mahfouz

As certain stocks and markets continue to unexpectedly plow to new 52 week highs, I think it’s time to look at the technical aspect of the indexes. For the week, the Dow Jones Industrial Average (chart) finished up 0.51%, the Nasdaq (chart) +1.84%, the S&P 500 (chart) +0.87% and the Russell 2000 (chart) +2.29%. I do not remember a time when equities have behaved this well in the month of August, albeit on very low volume.

Now to the technicals. I typically refer to two of the more popular technical indicators that certain market technicians, program trading models and even institutional investors utilize, and they are, the Relative Strength Index (RSI) and the Moving Averages technical indicators. The RSI is designed to demonstrate whether or not an index or equity is overbought or oversold, depending on certain value levels. According to the RSI principle, the 70 value level or greater, is an overbought condition and the 30 value and below is an oversold condition. Pertaining to the moving averages, the 50-day and the more closely monitored 200-day moving average, are the key markers that market technicians and program trading models look for and potentially act on.

In looking at the four major averages, they are all currently trading considerably above their respective 50-day and 200-day moving averages. However, both the Nasdaq (chart) and the S&P 500 (chart) is on the cusp of breaking through the 70 value level on the RSI. Furthermore, the Dow Jones Industrial Average (chart) and the Russell 2000 (chart) are not too far behind trading around the 65 value level. This is an indication that the markets are potentially becoming overbought and are due for some type of pullback. Please keep in mind that stocks can remain overbought or oversold for extended periods of time. That said, when the RSI on a given equity or index begins to trade at or above this key level, a reversal of some sort typically occurs. Now there are many other factors and technical indicators to refer to when analyzing market conditions, but my preference is to keep it simple when looking at the technicals, and the RSI and moving averages indicators do it for me. Good luck to all.

Have a great weekend 🙂

~George

 

What a difference a year makes…

Posted on by George Mahfouz

Last year at this time stocks were in a free-fall. At one point in August of 2011, the top four indicies were all down well over 10% on the month. Fast forward to this year and so far in August the Dow Jones Industrial Average (chart) is up 1.53%, the Nasdaq (chart) +2.77%, the S&P 500 (chart) +1.92% and the Russell 2000 (chart) +1.85%. It is very unusual for the markets to be posting gains in the dog days of summer. This is especially true when earnings reporting season has been less than stellar. Add into the mix a continuing flow of disappointing economic reports from around the world, and one would think we would be down 10% on the month!

So what gives? Call it an election year, call it the global flow of liquidity, call it what you want, but I am going to refer to the old adage on Wall street and that is “you can’t fight the tape!” This means when markets are trending lower or higher in this case, it’s best to go with the flow rather than try to pick the top to sell or sell short. However, it doesn’t make a lot of sense that we are at multi-month highs considering the global-macro picture. One thing is for sure, and that is stocks or indexes can remain overbought for extended periods of time regardless of the circumstances. Next week we will take a look at how the technicals are playing out in the markets to see if there is anything from a technical perspective that we should be paying attention to. Good luck to all.

Have a great weekend 🙂

~George

What a day for the bulls!

Posted on by George Mahfouz

Stocks took off right out of the gate this morning thanks in part to a better than expected payroll number. Private sector hiring had its best showing in five months creating 163,000 new jobs compared to the 100,000 number most economists anticipated. This was enough to send the Dow Jones Industrial Average (chart) up 217.29 points, the Nasdaq (chart) +58.13, the S&P 500 (chart) +25.99 and the Russell 2000 (chart) +19.88. After trading the majority of the week in the red, three of these four key indices closed slightly up on the week, with the sole exception being the Russell 2000 (chart).

One of the concerns I have about the July labor report is that even though the private sector hired more workers than anticipated, this number is still way below the 250,000 monthly jobs necessary to have a meaningful impact on the unemployment picture. I have also watched a deterioration of consumer confidence as of late along with sluggish retail sales numbers. This does not bode well for the overall economy because the consumer plays a significant role in how our economy performs.

Now to the markets. If you are an investor, or a trader for that matter, you might be scratching your head and asking, “how could equities be at multi-month highs when we have anemic job growth and weakening consumer confidence?” The answer is very simple and that is – the Fed. Policymakers here and abroad have made it abundantly clear, if the markets and/or the economy needs us, we will accommodate! This mantra and position has helped fuel stocks all year long. Unless the central banks change their tune, a floor will continue to be placed underneath this marketplace.

Personally, it is difficult for me to have the confidence in going long or short equities in this environment. On one hand, you have a struggling economy and lagging corporate earnings. On the other hand, you have central banks from around the globe having a “whatever it takes” attitude while injecting a steady flow of cheap money into the system. That said, there are trading opportunities on both sides of the fence and seemingly technical analysis may become more influential on stocks or indexes then anything else right now. Good luck to all.

Have a great weekend 🙂

~George