Healthy Corrective Action – Or Something More?

Are we in a healthy correction or is this something more? The recent market selloff including yesterday’s 500 point drop on the Dow Jones Industrial Average (see chart here) has caught the attention of investors and traders alike. The S&P 500 (see chart here) experienced its toughest month in over a year closing down almost 5%. The Nasdaq Composite (see chart here) was lower by over 5% in the month of September. It is not too surprising that the major averages were weaker to close out the third quarter. Historically, September and October for that matter are usually softer months for stocks.

So back to the question is this healthy corrective action or the beginning of a meaningful drawdown? The answer depends on who you ask or how you are interpreting the Federal Reserve’s updated guidance to the monetary policies that the Fed has in place. It is hard to be bearish here based on where the Federal Reserve currently stands. In one breath we hear that “bond purchases” will start to taper off before year end. Then in another breath, the Fed continues to signal that they are prepared to support our economy in the event we experience another surge in Covid. My feelings are the Fed will not put the brakes on their easy monetary policies until such time that our country is out of this pandemic. One thing is for sure, each upcoming Fed policy meeting and subsequent guidance will be put under a microscope more now than ever.

Let’s take a quick gander at the technical shape of the aforementioned indexes. The Dow Jones Industrial Average (see chart here) closed yesterday just below 34000 with its 200-day moving average currently at 33360. The S&P 500 (see chart here) closed yesterday at 4307 while also breaching and closing below its 100-day moving average. The Nasdaq Composite (see chart below) closed the month of September at 14448 also breaching its 100-day moving average. So the current technical set up could mean more downside ahead, but on the other hand, if these moving averages hold and acts as support, we could see a strong relief rally.

Good luck to all πŸ™‚


Healthy Corrective Action - Or Something More? - Paula Mahfouz


Is A Retest In The Cards?

Stocks apparently want to move higher and now the question comes to mind is a retest of the all time highs in the cards? Well if you look at the S&P 500 (see chart below) it sure seems so. The S&P 500 (chart) is at the earliest stages of technically breaking out of a 4 month trading range. Back in early November and again in early December the S&P flirted with the 2800 level before failing that level each time. In fact, in early December when the S&P tried to break the 2800 level not only did it fail to break through, it also went on to hit multi-year lows by the end of December. This is the time period where the bears started to growl and predict that stocks would continue to fall. Fast forward to today and not only did stocks reverse course since that late December sell-off, but now the key indices appear to be on the verge of breaking out. The Dow Jones Industrial Average (see chart here) also has bounced off its multi-year lows in December and is trading above its key moving averages, the Nasdaq Composite (see chart here) from a technical standpoint is also on the verge of breaking out, however the small-cap Russell 2000 (see chart here) has work to do to reclaim its 200-day moving average.

So what does all this technical jargon mean? It’s no secret the markets trade in algos and bots. Many of these algorithm trading platforms are programmed to certain technical indicators i.e. the 20-day, 50-day, 100-day and 200-day moving averages and/or the relative strength index aka the RSI. Furthermore, in many instances when the key indices are setup at a breakout level such as where the S&P 500 (see chart here) and the Nasdaq Composite (see chart here) find themselves at, momentum traders also come up to the plate and act. So we could very well indeed see the markets make a run to retest the all-time highs. Paula and I wish everyone a safe and Happy St. Patricks Day!

Good luck to all πŸ™‚


S&P 500 - George Mahfouz Jr

Russell 2000 – All Time High!

So now the small-caps join in! The Russell 2000 (chart) closed the week at an all time record high of 1490. For most of the year the widely followed small-cap Russell 2000 has lagged the other major averages. Now it has broken out, see (chart). In fact, when you look at the chart of the Russell, one can say this index has gone parabolic. The Nasdaq (chart) and the S&P 500 (chart) also closed at their all time highs on Friday, while the Dow Jones Industrial Average (chart) posted yet another positive week. What’s more is the month of September is typically one of the weakest months of the year for equities losing on average of 1.5% happening 70% of the time since the 1970’s. Not this year, in fact there have been so many record-breaking closes on all of the aforementioned indices it’s hard to keep track.

Question is, now what? With the third quarter of the year now in the books, Q3 earnings reporting season is right around the corner. I have got to believe with the Federal Reserve closing the chapter on their quantitative easing policy and now taking those assets off of their books, plus interest rates scheduled to rise, investors should pay closer attention to the health and growth of corporate earnings. Do you remember the days when earnings and earnings growth actually mattered? Well those days may be back upon us. Hence, the report cards that come in from corporate America may actually move the markets in a fundamental way. This we have not seen in almost a decade. However, if the market momentum that we have experienced since the election continues, and investors ignore the fundamentals, then why couldn’t we end the year at even higher highs?

One thing for sure is October will be filled with many catalysts that should bring in some volatility and a lot of opportunity.Β  Between now and year end may be the time to implement a hedged strategy where one can potentially profit regardless of how the indexes or individual stocks react to what’s ahead. I’ll cover this in my next blog. Good luck to all. πŸ™‚


Markets Cheer Fed Rate Hike!

As expected, the Federal Reserve raised short term interest rates by one quarter point and indicated that they will keep raising rates throughout the year albeit gradually. I do think what helped the markets yesterday was the language of only two more rate hikes this year. The economic data coming out so far is stronger than expected including the February jobs report which confirmed how the job market is continuing to expand and this had some pundits thinking three more rate hikes were in the cards for 2017, not just two. Markets rallied once again on the news and quite frankly the market is seemingly rallying on anything that hits the tape. That said, the Federal Reserve is doing a masterful job with how it is handling the change of guard so to speak from accommodation to raising rates and how they are communicating each message.

So what does this mean to the markets going forward? I gotta tell you as much as I have been expecting volatility to increase, my expectations now are as long as the Fed remains in its current position, volatility may just stay in hibernation until further notice. I have not seen a market to where vol has been and remains this low. As I write this blog the CBOE Market Volatility Index also know as the VIX remains historically low and even when there is pressure on stocks, the VIX does not move very much, just look at the chart below.

Taking a look at the four major indices, The Dow Jones Industrial Average (chart), the S&P 500 (chart), the Nasdaq (chart) and the small-cap Russell 2000 (chart) all are within striking distance of their record highs. The question now becomes will valuations be able to support the continuation of this bull market or will this be the catalyst to bring pause into this historic bull run. We won’t have to wait too much longer as the first quarter of 2017 winds down and companies prepare to report their earnings results beginning in April. Paula and I wish everyone a very safe and Happy St. Patrick’s Day πŸ™‚


VIX chart - Paula Mahfouz




Dow record in sight…

Stocks continue to head north this week with the Dow Jones Industrial Average (chart) flirting with an all time high. For the week, the Dow (chart) closed up 0.64% Β just 74 points away from notching a record, the Nasdaq (chart) finished the week up 0.25%, the S&P 500 (chart) +0.17% and the small-cap Russell 2000 (chart) closed the week out basically flat. Looking at the year to date performances of these key indices and you will see eye-popping gains of 7.52%, 4.98%, 6.45% and 7.70% respectively.

This wasn’t the case on Monday when the markets nerves were tested with fears of instability out of Italy and the ongoing sequester uncertainty here at home. This sent stocks spiraling with the Dow shredding over 200 points. However, true to its form, stocks regained their footing on Tuesday and throughout the rest of the week once again demonstrating how resilient equities are in this Fed friendly environment. Even Gold bounced off of its recent lows to close at $1572.30 a troy ounce, although still trending downward.

Looking ahead to next week, I am cautiously optimistic that we could see a record on the Dow with the caveat of headline risks out of Washington. If the sequester issue does not get some type of formidable resolution out of Congress, we will most likely see consumer confidence rattled and market confidence challenged. Chances are neither side of the aisle wants to be held responsible for the looming automatic spending cuts which in turn would be a serious blow to our fragile economy. Nonetheless, it would be wise to tread these markets carefully and make sure to always consider using protective stops in your portfolio. Good luck to all.

Have a great weekend and profitable March πŸ™‚


5% haircut since election day…

One can surmise that the markets have most certainly voted! Once again stocks sold off this week in light of the fiscal cliff fears and whether or not Washington will be able to get a deal done. For the week, the Dow Jones Industrial Average (chart) fell 1.77%, the Nasdaq (chart) -1.78%, the S&P 500 (chart) -1.45% and the small-cap Russell 2000 (chart) closed lower by 2.36%. There was a bit of reprieve from the selling pressure yesterday after both sides of the aisle came out of their first formal fiscal cliff meeting and indicated progress was being made. This was enough to help the aforementioned indexes to close in the green on Friday.

The market climate that we are now in reminds me of last summer when Congress was battling it out over the debt ceiling crisis and how the key indices were down close to 10% in a short period of time. Back then market volatility was historic while the politicians were duking out that crisis. Although stocks are certainly in correction mode, what I am not seeing this time is enormous volatility. Let’s take a look at the VIX indexΒ (chart). The VIX, also known as the fear gauge, is used as an indicator of investor sentiment. Right now the value of the VIX (chart) is not indicative of extreme panic in the marketplace especially when you compare it to last summer. Hopefully Washington can come up with a solution to resolve the fast approaching cliff which would restore confidence and calm the markets. Good luck to all.

Have a great weekend πŸ™‚


What a difference a year makes…

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 πŸ™‚