Is That It?

After what appeared to be the beginning of a healthy correction in the early part of August, stocks held true to form and rallied back this week even as Ukrainian forces engaged and attacked a Russian armored convoy today. When news leaked about the attack, the markets did reverse their earlier gains and dropped meaningfully only to find support and rebound off sessions lows. The Nasdaq (chart) actually finished the day in the green. If you are long this market and are bullish for the remainder of the year, you have got to feel pretty good about how the markets have responded this week to a very unstable geopolitical global environment. For the week, the Dow Jones Industrial Average (chart) gained 0.66%, the Nasdaq (chart) finished the week up 2.15%, the S&P 500 (chart) +1.215% and the small-cap Russell 2000 (chart) closed the week up 0.91%.

Does this mean we are out of the woods yet? I am not so sure. One thing that I believe will continue is market volatility. There is headline risk and equities are certainly reacting to sudden headlines that come out of Ukraine as well as the middle east. The surprise I think is how resilient the U.S. stock market remains in the midst of the geopolitical risks that are upon us. However, this is the one thing that continues to concern me is the escalation of conflict in not just one region but now in two. One way to insure a portfolio is to buy some protection in the form of S&P 500 puts, and more specifically puts on one the most popular ETF that tracks the S&P 500, the SPDR S&P 500 (NYSE: SPY) (chart). So if you have a long portfolio in equities, by buying put protection with the SPY’s, it is like buying an insurance policy should the equity market experience a correction. Put options go up in value should the equity or index you buy puts in goes down in value. Options are not for everyone and it is usually wise to consult with a certified financial planner(s) before implementing any investment strategy, I am just illustrating one way to protect a long portfolio by way of insuring it to a certain degree.

As far as I am concerned, I will continue to monitor the technical conditions of the aforementioned indexes and look for any signs of overbought or oversold conditions to act upon. As of right now the key indices are not in either condition. Good luck to all 🙂

Have a great weekend.


The Moment Of Truth May Be Upon Us…

We may be entering a period of where good economic news may be bad for stocks? U.S. gross domestic product bounced back sharply at a seasonally adjusted annual rate of 4% in Q2, according to the Commerce departments G.D.P. report issued on Wednesday. This was surprisingly higher than the consensus forecasts of 3% growth for the second quarter. Now wait a minute, isn’t economic expansion good for stocks? Well not if the markets have relied on ultra low interest rates and assets purchases by the Fed as the cushion and floor to the stock market. Stocks had one of their worst performances of the year yesterday and for the month of July the Dow Jones Industrial Average (chart) lost 1.56%, the tech heavy Nasdaq (chart) gave back 0.87%, the S&P 500 (chart) -1.5% and the small-cap Russell 2000 (chart) closed the month of July lower by an eye-popping 6.1%. Now the question becomes is this the beginning of a longer term trend in the marketplace or just another buying opportunity? Personally, I am a bit concerned over the set-up of the markets in general and it’s no secret a correction in equities has been long overdue. Add to the mix that historically and seasonally, August through October hasn’t been a favorable time for stocks. So I think erring on the side of caution may be the wise thing to do.

Let’s take a look at the technical set-up of the aforementioned key indexes. The first thing I want to look at is whether or not the markets are overbought or oversold according to the RSI principle. The relative strength index a.k.a. the RSI, is a technical indicator that compares the size of moves of both recent gains and losses to determine overbought and oversold conditions. The 70 value level and higher and the 30 value and lower are considered extreme conditions. As of the close of trading yesterday, the Dow Jones Industrial Average (chart) RSI was at 32.09, the Nasdaq (chart) RSI was at the 44.24 value level, the S&P 500 (chart) RSI was at 35.85 and the small-cap Russell 2000 (chart) RSI was at 34.76. So as you can see these key indices are not yet in extreme oversold conditions. From a technical standpoint, my preference is to enter positions only when extreme conditions occur, that is when RSI levels are below 30 or above 70. Of course this position has to be supported by strong fundamentals as well. When you have both factors going for you, chances are the set-up would most likely provide favorable results.

Now another favorite technical indicator of mine are the moving averages. The 20-day, the 50-day and the 200-day are the most popular moving averages certain market technicians utilize. The moving average lines historically provide support and/or resistance depending on which side of the line the asset resides. As of the close of yesterday, the Dow Jones Industrial Average (chart) fell below its 50-day moving average for first time since mid-May, the Nasdaq (chart) fell below its 20-day, however, its still trading above its 50-day and may find some support there? Looking at the S&P 500 (chart), it too has fallen below its 50-day moving average and the small-cap Russell 2000 (chart) has now taken out its 200-day moving average and is technically the weakest index of the group.

So as you can see, the markets are not yet in extreme oversold conditions according the the RSI principle and the moving averages are currently being violated, which may indicate that the selling pressure may not be over. Of course this is only a technical recap of current market conditions which is only one component that can shape the markets. Please remember that it is best to always consider consulting with a certified financial planner(s) before making any adjustments to your portfolio or developing any investment or trading strategies .

Best of luck to all 🙂