Federal Reserve

Where Is The Vol?

Posted on by George Mahfouz

As the second quarter came to a close yesterday volatility is no where to be found. The CBOE Market Volatility Index also referred to as the VIX has been pretty much dormant this entire year (chart). Typically vol ticks up as we approach summer for a variety of reasons such as earnings reporting season, seasonality and of course the Federal Reserve policy actions. As expected the Fed did raise rates in June but the markets appear to be pricing in a higher interest rate environment. So far this year the Dow Jones Industrial Average (chart) is up 8.03%, the S&P 500 (chart) is up 8.24%, the Nasdaq Composite (chart) is up a whopping 14% and the small-cap Russell 2000 (chart) is up a modest 4.29%.

Seemingly everyday stocks are in melt-up mode. There are days where volatility tries to rear its head up, but that does not last very long. (See chart below). Even when Goldman Sachs came out with a bearish report on June 9th comparing the red-hot tech sector to the internet bubble era, the negative effect of that report lasted only a couple of days before tech found support and then proceeded to make new highs. The traders and investors that are waiting for the proverbial 10% or more correction are just not getting it. Buying the pullbacks is what has been working ever since the election but the problem is that if you are not stepping in on the 1-3% percent retracements, you are missing the next leg up. How much longer can this type of market environment last? Now that Q2 is in the books, earnings reporting season will soon begin. Let’s see if corporate earnings continue to come in stronger than analyst expectations and if so, stocks may just continue to remain bulletproof.

A quick gander at the technical shape of the aforementioned indexes and there are no signs of overbought or oversold conditions according the relative strength index. Therefore I am expecting vol to remain relatively low until at least second quarter earnings season begins. Good luck to all!

Both Paula and I wish everyone a very safe and happy Fourth of July holiday weekend 🙂

~George

VIX Chart - Paula Mahfouz

Are Energy Stocks And Banks Cracking?

Posted on by George Mahfouz

As technology stocks continue to tick up to new record highs, banks and even more so energy stocks are showing signs of weakness. Yesterday, the Nasdaq (chart) hit an all time high of 6221.99 and the S&P 500 (chart) also notched a record recently at 2418.71. That said, the energy sector has lost almost 10 percent in the last month or so and the banking sector is beginning to technically breakdown. A very noticeable divergence is happening here and I think it is time to pay attention to this recent dynamic. The Dow Jones Industrial Average (chart) remains above 21000 and the small-cap Russell 2000 (chart) is seeking direction.

I am not surprised that certain sectors of the market are showing weakness which is only normal with the tremendous run the markets have had since the election, however, it is the sectors that are breaking down that is a bit alarming to me. One has to ask is the price action in oil and energy stocks indicative of weakening demand hence a weakening economy? Or is this just a matter of too much supply in oil regardless of the O.P.E.C. commitment to its production cuts. As far as the banks are concerned, one would also think with the Federal Reserve raising interest rates at their upcoming meeting in June and committing to additional rate hikes this year. that this would be bullish for bank stocks. Not the case recently. I am a little perplexed to the way the tape has been acting as of late especially pertaining to the aforementioned sectors.

The technical shape of the key indices appear to be intact with the exception of the small-cap Russell 2000. The Dow Jones Industrial Average (chart) is trading well above its 50-day moving average, along with the S&P 500 (chart)  trading near all-time highs and the Nasdaq (chart) as mentioned above hit an all-time high yesterday. However, the small-cap Russell 2000 (chart) is trading below its 50-day moving average and has been challenging certain support zones lately. This is yet another potential alarm along with the energy and banking sector weakness lately. So I would not be surprised to see the selling pressure in these particular sectors continue in the month of June which is historically one of the weakest month of the year for stocks. Good luck to all 🙂

~George

Solid Gains In Q1!

Posted on by George Mahfouz

The major averages closed out the first quarter of the year posting solid results. The Dow Jones Industrial Average (chart) closed up 4.6%, the S&P 500 (chart) closed up 5.5%, the small-cap Russell 2000 (chart) gained 2.1% and the technology focused Nasdaq (chart) finished out the first quarter of the year up an eye-popping 10%. It’s no surprise how well tech did in Q1 considering how much this sector sold off after Trump won the election.

Although stocks continue to outperform, there has been some uncertainty coming into backdrop. The GOP’s inability to pass Trumpcare was the first sign of the potential breakdown of the new administration’s policies. Investors are beginning to wonder whether or not there will be more divide amongst republicans and how that could affect the upcoming tax reform bill. If there are any snags there or if that reform does not pass, some market pundits believe a 10-20% correction could occur.

Here are my thoughts about that. I do agree that if the proposed Trump tax reform does not go through, there indeed could be an immediate market reaction to the downside. How much, who knows? The markets are seemingly priced to perfection and then some. So if corporate tax rates are not reduced as Trump and his administration has outlined, why wouldn’t stocks be affected? Of course we will not know until late summer how the administration’s new tax policy will look like in its final state or whether or not it will even pass.

That said, there is plenty of runway between now and then for stocks and this starts with first quarter earnings reporting season. April is the month in which companies begin to report their earnings results to their shareholders. Corporate profits appear to be growing along with the economy. This my friends is where investors should be valuing stocks. So much emphasis has been put on the new administration’s economic and tax reform policies that we need not to forget about what really matters and that is corporate profits. That is not to say that government polices including the Federal Reserve don’t matter, but at the end of the day and when all the votes are in, growth and profits to me is what truly matters when valuing and investing in stocks.

Good luck to all 🙂

~George

 

Markets Cheer Fed Rate Hike!

Posted on by George Mahfouz

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 🙂

~George

VIX chart - Paula Mahfouz

 

 

 

Happy New Year!

Posted on by George Mahfouz

Happy New Year to all and what a year of celebration for the bulls in 2016. The major averages last year notched very impressive gains. The Dow Jones Industrial Average (see chart below) finished the year up 2,337 points or 13.42%, the tech focused Nasdaq (click here for chart) closed up on the year 376 points or 7.5%, the S&P 500 (click here for chart) closed up 194 points or 9.54% and the small-cap Russell 2000 (see chart below) finished out 2016 up a whopping 221 points or almost a 20% gain outperforming most benchmarks. This eye-popping rally really kicked into high gear after the stunning upset victory Donald Trump pulled off over Hillary Clinton in the presidential election. So that was last year, now let’s take a look at 2017 and what lies ahead.

I begin with the obvious. Markets are certainly overbought and have been since the November 8th election results. Then in December, the Federal Reserve raised interest rates for the first time in a year and then added language for an additional rate hike in 2017 to bring the total projected rate hikes this year to at least three. Historically a rising interest rate environment puts pressure on equities and in particular the high beta names. Consensus has it that the Fed will move slowly to avoid any shocks to the economy or the markets. However, with Donald Trump’s proposed economic pro-growth policies, debt and inflation should rise. So I am sure the Federal Reserve will be keeping a close eye on how inflation ticks up as 2017 unfolds. Should inflation rise faster than anticipated this too could be a challenge for the Fed and our stock market.

So based on our current market environment it is my view that volatility will not only pick up in January but the recipe described above signals potential elevated volatility throughout the year. We also will begin to hear from corporate America this month as we head into earnings reporting season. I would expect earnings from multi-national companies to be a bit challenged due to the continuing and significant strength that the U.S. dollar has been exhibiting. That said, there will be opportunities abound in this new year but I am preparing to embrace volatility and hedge my positions going forward. In my next blog I will talk about hedging strategies in order to offset the impact of potential increased vol. Until then, both Paula and I wish everyone the happiest and healthiest new year to all. 🙂

~George

Dow Jones chart Paula MahfouzRussell 2000 post george mahfouz jr

 

As Expected, The Fed Raises Rates…

Posted on by George Mahfouz

To no surprise, the Federal Reserve raised interest rates 1/4 point today citing stronger economic growth and a pick-up in inflation. A stronger job market also played a role in the decision of the Fed. What wasn’t quite expected was the language of an additional anticipated rate hike from the projected two hikes in 2017 to now three. This might of caused the slight sell-off yesterday in the markets with the Dow Jones Industrial Average (chart) falling 118.68 points, the S&P 500 (chart) was lower 18.44 points, the Nasdaq (chart) fell 27.15 points and the small-cap Russell 2000 (chart) retraced by 17.51 points.

With all things considered, this pullback was long overdue. In fact, I am surprised that the markets held up like they did yesterday. Especially considering the rip roaring rally most equities have enjoyed since the presidential election. Markets have been on fire with the Dow Jones Industrials (chart) gaining almost 1,600 points, the S&P 500 (chart) ripping 125 points, the Nasdaq (chart) catapulting about 300 points and the small-cap Russell 2000 (chart) up a staggering 170 points. What a breathtaking rally in such a short period of time.

So what can we expect between now and year end? Let’s think about this for a minute. If you are an institutional investor, fund manager, hedge fund or the like would you be taking profits into year end? Or would you wait until we get into the new year knowing that capital gains taxes and corporate taxes are coming down? I think it is fair to say the latter would make the most sense. Add into the mix the rotation that continues out of the bond market and into equities in which certain pundits believe we are in the fourth or fifth inning of that rotation, one has to ascertain that this bull market has more room to run.

Whatever the case I think pullbacks will be bought as momentum continues into year-end. Paula and I wish everyone the happiest and healthiest holiday season 🙂

~George

All Eyes On Jobs Report…

Posted on by George Mahfouz

The chatter has increased lately as to when the Federal Reserve will raise interest rates from their historic lows. We may not need to wait much longer to get that answer. Although it is a holiday weekend, the August jobs report will be released tomorrow and the pundits are suggesting that if the economy added more than 200,000 jobs in August, the Federal Reserve will raise rates this month. From my view a quarter point rate hike here in September is no big deal. I think the markets will have a muted reaction. However, if this is the beginning of a consistent pattern then this becomes an entirely different discussion. I do not expect that the Fed will be too aggressive with future rate hikes and of course the economic data will play a role in those decisions.

So what about the markets? We are coming into a seasonality that is typically a weaker time for stocks. What’s more, the markets will also begin to focus on the presidential election and the polls associated with it. That said, I expect an increase in volatility as we head into the fall. There are other catalysts that could weigh in on stocks such as potential changes in global monetary policies and Q3 earnings reporting season in October. The key indices continue to demonstrate strength with the S&P 500 (see chart below) being supported by its 50-day moving average click here, the Dow Jones Industrial Average (see chart below) is within a couple percentage points of its all-time highs, and both the Nasdaq (chart, click here) and the small-cap Russell 2000 (chart, click here) are trading right around their 20-day moving averages. So as of yet, stocks do not appear to be too concerned with the upcoming market seasonality and other potential catalysts that could play a role in interrupting the uptrend we have been in.

Both Paula and I wish everyone a very safe and happy Labor Day weekend 🙂

~George

S&P chart george mahfouz jr

dow jones chart george mahfouz jr

Looks Like A Double Top…

Posted on by George Mahfouz

A recent attempt to breakout to all-time highs has seemingly failed. The Dow Jones Industrial Average (see chart below) , the tech-focused Nasdaq (see chart below), the S&P 500 (see chart below) and the small-cap Russell 2000 (see chart below) all appear to have “double topped” and have retreated to support lines. Without question growth concerns here in the United States are abound. These concerns escalated right after the release of May jobs report which was dismal to say the least. Couple these concerns with the potential of the United Kingdom leaving the European Union and its no wonder why the markets have pulled back over the past couple of weeks.

One of the risks to the markets that I highlighted in my last blog were interest rates. It appeared at the beginning of the month that the Federal Reserve and market pundits were all but certain that a rate hike would occur at today’s Federal Reserve meeting. Well thanks to the underwhelming May jobs report, no rate hike occurred this month and furthermore the Federal Reserve have lowered their outlook for any near term future increases! The Fed did say that they will be monitoring our economy and the data to guide them in their future policy decisions and sure enough they continue to stand by this protocol.

Now what? First for me, I want to see how the market reacts to next Thursday’s vote as to whether or not Britain leaves the European Union? Momentum does appear to be increasing for a British exit, which could lead to a global slowdown? Nobody knows if the referendum will pass or what type of effect this will have across the pond or here in the U.S. In the meantime, I will be monitoring the technical shape of our key indices and as you can see in the below charts each of these indexes have found support at either the 20-day, 50-day or 200-day moving averages.

Good luck to all 🙂

~George Mahfouz, Jr.

george mahfouz jr SPX chart

george mahfouz, jr Russell chart

 

 

george mahfouz jr Dow chart

george mahfouz jr nasdaq chart

Rate Hikes Are Looming…

Posted on by George Mahfouz

Janet Yellen the chair of the Federal Reserve last Friday signaled that the Federal Reserve is prepared to raise interest rates in the coming months should the U.S. economy continue to improve. Some pundits suggest that a rate hike could come at the Fed’s next policy meeting in two weeks. Despite the rate hike chatter, the markets continue to shrug off what seemingly could be bearish for stocks. The Dow Jones Industrial Average (see chart below) is within striking distance of all time highs. Same can be said for the S&P 500 (see chart below), the Nasdaq (see chart below) finds itself flirting once again with the 5000 mark and the small-cap Russell 2000 (see chart below) appears to have caught a bid and is strengthening.

This type of market activity is counterintuitive when interest rates appear to be heading north. The flip side to this thinking is if the Federal Reserve is willing to raise rates due to a stronger economic back-drop, one can assume that this must be good for corporate America. Logically speaking I agree, however, if history has anything to do with the markets, a rising interest rate environment typically does not bode well for equities. Couple this with the seasonality of the summer months which tend to be weaker months for stocks and the upcoming fall presidential election, and I would say at the very least we will see a rise in volatility. These are very powerful forces that are lining up and I think it’s safe to say the markets will be very reactive to these events.

So what’s a trader or investor do in this landscape? For me personally I think the type of environment we are heading into creates opportunity on the long and short side. I will be paying close attention to overbought and oversold conditions of the markets and select equities throughout the summer and into the fall. As everyone knows by now my favorite technical indicator when it comes to spotting overbought/oversold conditions is the Relative Strength Index also known as the RSI. Many market technicians also favor this technical indicator when assessing market conditions from a technical standpoint. Over the years the RSI has demonstrated its usefulness and if you are not familiar with this technical indicator, you may want to research it out. Click here for starters.

Both Paula and I wish everyone a very safe, prosperous investing and trading summer 🙂

~George Mahfouz, Jr.

Screen Shot 2016-05-30 at 8.00.40 PMGeorge Mahfouz Jr. S&P 500 chartGeorge Mahfouz Jr. Nasdaq ChartGeorge Mahfouz Jr. Russell 2000 Chart

 

Stocks Are Back!

Posted on by George Mahfouz

Since losing over 10 percent of their values and going into correction territory earlier this year, the major averages now find themselves almost back to par. Year-to-date the Dow Jones Industrial Average (chart)  is only down around one percent, the S&P 500 (chart) is also lower by around one percent, the Nasdaq (chart) on the year has gained back over half of its losses and the small-cap Russell 2000 (chart) is lower by 4.5%. Since this bull market began over seven years ago, time and time again stocks have demonstrated astounding resilience. Seemingly every time there is a sell-off, willing buyers are ready to step in at varying support levels and buy up equities.

Today the Federal Reserve left interest rates unchanged and actually slashed their forecast to project only two additional rate hikes for the rest of this year versus the four rate hikes they had originally targeted. Stocks initially popped on the news and only one can conclude that the continuing accommodating monetary policies not only here in the United States, but from around the world is most likely the reason why this seven year bull market continues.

That said, the aforementioned indices are approaching overbought conditions according to the relative strength index. Remember the RSI is one of the favorite technical indicators by market technicians, certain algorithmic programs and institutional investors alike. The relative strength index measures and compares the size of moves in a selected period of time and according to the RSI, the 70 or greater value level signals an overbought condition and the 30 value level or lower indicates an oversold condition. Keep in mind stocks and/or indexes can remain overbought or for that matter oversold for an extended period of time. Currently the Dow Jones Industrial Average (chart) is almost touching the 70 value level and the other indexes are not too far behind. Of course this is only one of many technical indicators that traders and investors utilize, but I have found over the years the RSI is one of the more reliable indicators out there.

Good luck to all 🙂

~George