Federal Reserve

No Bubble Here…

Posted on by George Mahfouz

At least according to Janet Yellen as she spoke before the Senate Banking Committee on Thursday. In a prepared speech to the committee, Vice Chair Yellen stated that the U.S. economy continues to improve and that the housing market has turned a corner with construction, home prices and sales up significantly. Ms. Yellen went on to indicate that she supports the Federal Reserve’s monetary policies which continue to purchase bonds and mortgage backed securities. Investors took this cue as a very positive sign going forward and sent the markets yet again to all time highs this past week.

For the week, the Dow Jones Industrial Average (chart) closed up 1.3% and is also closing in on the 16,000 mark, the S&P 500 (chart) gained 1.6%, the Nasdaq (chart) +1.5% and the small-cap Russell 2000 (chart) finished the week up 1.47%. Stocks continue to be on a tear and now it is clear that unless their is some unforeseen negative macro-event that occurs from now until year end, these markets should close the year out with over 20% gains respectively. Now that doesn’t mean that pullbacks or even a modest correction couldn’t occur, but should this be the case, I would assume that any retracement would be met with the “buying the dip” mentally that has gone on all year long.

Now let’s take a look at how the technical conditions are shaping up for the aformentioned key indices. When I consider running a technical analysis on stocks or indexes, the two indicators I favor the most are the Relative Strength Index also know as the RSI and the moving averages. Out of plethora of technical indicators out there, these particular indicators are the most reliable, at least for me. Part of the reason why I favor the RSI and moving averages indicators are that many computerized trading models and certain institutional investors utilize them, which in turn moves the market. Historically, when the Relative Strength Index (RSI) is at an overbought or oversold condition, the majority of the time the asset or index reverts back to the mean. Same rings true with the moving averages, whenever a stock or index rises up against or comes down to its moving average, typically the stock or index finds support or resistance. So in looking at the current state of the Dow (chart), S&P 500 (chart) , Nasdaq (chart) and the Russell 2000 (chart) all of these indexes are indeed approaching overbought territory which according to the RSI definition is the 70 value level, but they are not there yet. Actually, my personal preference is to not only see a breach of the 70 value level but a continuation up into overbought territory before I consider selling into that condition. As it pertains to the moving averages technical indicator, these key indices are all comfortably above their respective 20-day and 50-day averages, with the 200-day moving average no where in sight.

So what does all of this mean? Technically speaking and considering we are heading into year end, there is a high likelihood that markets continue to head north, but I will be paying close attention to the technicals as to when we may see the inevitable pullback.

Good luck to all and have a great weekend 🙂

~George

Finally Congress Gets a Deal Done!

Posted on by George Mahfouz

After 16 days of a partial government shutdown, Congress finally came to terms to reopen the government and raise the debt ceiling. Talk about waiting until the last minute! Needless to say, stocks over the past couple of weeks have experienced an increase in volatility with triple digit gains and losses during the shutdown. Despite the turmoil in Washington, the Dow Jones Industrial Average (chart) on Wednesday closed up over 200 points, the Nasdaq (chart) managed to close at a 13 year high, the S&P 500 (chart) is nearing its all time high and the small-cap Russell 2000 (chart) finished the trading day at an all time record. Now the street can focus on Q3 earnings reporting season and so far, not so good.

After the close yesterday, bellwether International Business Machines (NYSE: IBM) shocked the street by missing revenues by almost $1 billion dollars and is down nearly seven percent in pre-market trading. Also after the close yesterday, Ebay (NasdaqGS: EBAY) reported in-line revenues, however guided lower for the upcoming holiday season. With Q3 earnings reporting season kicking into to high gear, I am questioning whether or not this will become the trend for the quarter? Most analysts do not expect this to be a robust quarter for corporate America, so now the question becomes does the imminent pullback in stocks become a buying opportunity before year end? Quite frankly with the headline risk out of Washington seemingly over for now, I beleive that the trend of pullbacks being bought will continue between now and year-end. I will look at key technical support levels for possible entries, and on the S&P 500 (chart) the 1680 zone appears to be the first level of support, which also happens to be its 50-day moving average, followed by the 1620 area. What gives me this vote of confidence of a continuing bull market into year-end is not necessarily how corporate earnings will fair, but the fact that the Federal Reserve continues to promise that it will do whatever it takes to support the economy, hence the bull market should continue. That said, when the Federal Reserve begins to taper, this will be the time that corporate America will truly need demonstrate top-line growth. In closing, no matter how your portfolio is positioned, it is usually the best practice to implement some type of protective stop initiative and of course always consult with a certified financial professional(s) while considering any investment strategy. Good luck to all. 🙂

~George

 

Despite a Partial Government Shutdown, Stocks Rally…

Posted on by George Mahfouz

No matter what has been thrown at this bull market over the past few years, nothing seemingly can slow it down. After the key indices finished the month of September with unlikely gains, stocks continued their upward trajectory today even though Congress couldn’t agree on a short term budget deal to keep our government fully operating.

For the first day of October, the Dow Jones Industrial Average (chart) finished up 62.03 points, the Nasdaq (chart) +46.50 points, the S&P 500 (chart) +13.45 points and the small-cap Russell 2000 (chart) closed the day up 13.64 points. Pundits are speculating that with the government in a partial shutdown, Congress will now have to address the debt ceiling and budget at the same time which a likely compromise will come forward on both issues, hence, bullish for stocks. Not sure if I fully agree with that thesis. Furthermore, the bulls make yet another case that by having this budget and possible debt ceiling impasse, this will keep the Federal Reserve in full accommodative policy mode. Now this in my opinion would be a more bullish thesis. However, lets not forget we have now entered into the fourth and final quarter of the year and third quarter earnings reporting season is on its way.

Needless to say, the markets have a ton to digest over the coming weeks including Q3 earnings reporting season and I am expecting volatility to continue to increase. From a technical standpoint, the Nasdaq (chart) and the small-cap Russell 2000 (chart) stunningly hit new 52-week highs today and continue to outperform the Dow Jones Industrials (chart) and the S&P 500 (chart). The Dow and S&P did bounce off of key support levels yesterday and have resumed their uptrends, at least for now. In addition, both the tech-heavy Nasdaq (chart) and small-cap Russell 2000 (chart) are once again approaching overbought territory heading right into earnings reporting season, which could be of interest to the bear camp.

As volatility increases, one strategy that can potentially bode well is to sell option premium on select indexes or stocks in order to capitalize on the increased vol. This strategy is not for the novice and one should consult with a certified financial consultant before implementing any strategy, especially options strategies. But for the more advanced investor or trader, this type of environment is almost perfect to participate in a “selling option premium” program. Option premium is essentially income generated by an investor who sells premium to another party and hopes to keep the entire premium without having the option exercised. Let’s look at one example of a “selling premium, covered call strategy”. Let’s assume you own 1000 shares of Facebook (NasdaqGS: FB) at $50 per share. You can choose to “sell” a.k.a.”write” a covered call option on the Facebook shares you own. If you take the monthly October $52.50 calls that are currently trading for $1.20 and sell/write them against your position, you would take in $1,200.00 less transactions costs. This is the premium you would receive for writing/selling this covered call. If Facebook closes below $52.50 on expiration day you keep the entire premium as well as your 1000 shares. If Facebook closes above $52.50 on expiration day you still keep the entire premium earned, however, your 1000 shares of Facebook would be called away at $52.50 because you sold your rights to the stock you own to another party for $52.50. If this is the case, you would be a not only be benefiting from the options premium income, but also a stock appreciation outcome for in this example the initial cost basis for the Facebook position is $50.00 per share. So you would gain an additional $2.50 per share in profit. Please note that a covered call strategy is typically a bullish strategy and again this is just one example of how “selling options premium” can work. In closing, this is not a recommendation just an illustration on how an investor or trader can potentially benefit with option premiums. Please remember it’s always best to consult with a certified financial planner(s) before implementing any investment strategy.

Good luck to all 🙂

~George

 

Chalk one up for the bears…

Posted on by George Mahfouz

The month of August proved to be the most challenging for the bulls in over a year. For the month, the Dow Jones Industrial Average (chart) closed down 4.45%, the tech-heavy Nasdaq (chart) -1.01%, the S&P 500 (chart) -3.13%, and the small-cap Russell 2000 (chart) finished the month lower by 3.29%. There are many factors that one can point the finger to as to why equities retraced last month, however, let’s keep in mind that on the year, these key indices are still up double digits with the Nasdaq (chart) and Russell 2000 (chart) leading the way up nearly 20%.

In my last blog, I questioned whether or not the weakness in August was a mere pause in this incessant bull run, or a preview of things to come? I think we will most certainly get this answer here in September and as early as this upcoming week. Between the crisis in Syria and what the ramifications could be after the possible airstrikes, to a slew of economic reports which culminates on Friday with the August employment report. Friday’s jobs report is expected to be the determining factor as to if and how much the Fed will begin to reduce its bond purchases. The Fed taper seemingly is all we have heard about since the beginning of summer and is part of the reason for the recent increase in volatility. Traders really don’t know what to expect once quantitative easing begins. For years the markets have had the back stop of the Federal Reserve and from central banks around the world. Personally, I think that once the Fed begins to pullback its bond purchases, we will then begin to see a more realistic market environment. This would be an environment that investors and traders can finally gauge their actions from true economic and corporate earnings performances, rather than what the Fed will or will not do. With that said, I expect volatility to continue to increase with a more normal ebb and flow of asset prices.

Technically speaking, the Dow Jones Industrial Average (chart), the S&P 500 (chart) and the Russell 2000 (chart) are all now trading below their 50-day moving averages  which is something I am paying close attention to now. In the coming days if the Nasdaq (chart)  joins in and begins trading below its 50-day, we could be in for very choppy trading and another leg down in September. Good luck to all.

Happy Labor Day 🙂

~George

Record breaking July!

Posted on by George Mahfouz

The month of July served up all time highs as Q2 earnings reporting season begins to wind down. For the month, the Dow Jones Industrial Average (chart) closed up 3.50%, the tech-heavy Nasdaq (chart) gained a whopping 6.8%, the S&P 500 (chart) +4.38% and the small-cap Russell 2000 (chart) closed the month up 5.6%. The rally in stocks continue thanks to favorable corporate earnings for the most part, and the Federal Reserve keeping its commitment to do whatever it takes until the economy can stand on its own two feet. Yesterday, after the Federal Reserve’s 2-day policy meeting ended, the central bank reiterated that it would continue its $85 billion per month bond buying program and keep interest rates near zero to help support and strengthen the economy.

That said, August begins with quite the test as all eyes will be on tomorrow’s  jobs report. The July unemployment report should be the most scrutinized report of the year as the Federal Reserve has been on the record recently signaling as to when they may start pulling back on its monthly bond purchases. A stronger than expected report may compel the Fed to begin tapering as early as September. However, if job growth continues to be modest, then I think its safe to say the accommodative policies of the Fed will continue into the foreseeable future. So you may ask what does this all mean to the market? This may become the case where good news in the labor market may be bad news for stocks. I know it seems counterintuitive, however, just the notion in late May that the Fed was considering tapering sooner than later sent the markets down five percent in a matter of a couple of weeks. I think everyone from the hedge fund community to mutual funds to institutional investors and even the individual retail investor have been so reliant on this accommodative Fed, that once the tapering actually begins, we may just see the stock market correction the bears have been anticipating all year long.

Technically speaking, although the markets are seemingly overbought, the key indices are not at extreme overbought conditions, just yet. Let’s take a look at the relative strength index (RSI) on the Dow Jones Industrial Average (chart), the Nasdaq (chart), the S&P 500 (chart) and the Russell 2000 (chart). As you can see, these indexes are trading below the 70 value level which is the level most market technicians consider an extreme level. I personally consider the 75-80 value level as extreme, especially in today’s market environment. That said, it appears there has been some consolidation going on over the past couple of weeks with the aforementioned indexes which have been trading in a pretty tight range.  Just maybe tomorrow’s unemployment report will be the catalyst for stocks to breakout of its recent trading range and begin a new trend. I view a breakdown of the 1650 zone in the S&P 500 (chart) as bearish. However, should the S&P 500 (chart) break and close above 1700 in a meaningful way, we may just see the extreme overbought conditions come into the marketplace as mentioned above. Good luck to all and I wish you all a very profitable month.

All the best 🙂

~George

En route to 20%? Wait a minute…

Posted on by George Mahfouz

As stocks and key indices continue to break records, the four major averages are now approaching 20% gains year to date. So far this year, the Dow Jones Industrial Average (chart) is up a whopping 15.37%, the Nasdaq (chart) +13.81%, the S&P 500 (chart) +14.55% and the small-cap Russell 2000 (chart) is up year-to-date 14.81%. But hold the phone! A report issued after the close on Friday just might be what the bears have been looking for and what could be a catalyst to a pause or pullback to these red hot markets.

On Friday after the close, an article came out in the Wall Street Journal citing that the Federal Reserve has begun to map out a strategy for winding down its $85 billion-a-month bond buying program. This super aggressive part of the ongoing stimulus program has played an enormous role in the lift in equities and the economy over the past year or so. Although the article cited a variety of options that the Fed is outlining, there are some Fed officials calling for the wind-down to begin as early as this summer. I will be very interested to see how the markets react to the report this upcoming trading week. I do not think anyone expects that the Fed will be overly aggressive with any adjustment it makes, but nonetheless, stocks have been a huge beneficiary of this extraordinary component of the stimulus program. I wouldn’t be surprised if the markets will take this latest cue and begin to exhibit an increase in volatiltiy. Besides, and as everybody knows, equities have been long overdue for a pause at the very least, and even more so a healthy pullback.

As I look to the internals of the market, this unprecedented run stocks have had so far this year has been on lighter volume, but this also has been the case since the bull market began back in 2009. Whatever the case is, without question these markets have been and are over extended to say the least. Let’s see if the Fed’s latest statement shakes the trees out a bit. I am considering initiating a short bias theme in certain indexes but will have the utmost discipline in protecting any positions by have very tight stops. Seemingly, almost everyone who has attempted a short strategy this year most likely endured a great amount of grief, however, at some point and time the bears should have their day in the sun. I am not suggesting that anyone should short this market or any market for that matter, short selling markets of any kind involves a significant degree of risk and is not for the feint of heart. That said, and as always, make sure to consult with a certified financial advisor of your choice when considering any investment strategy. Have a great week 🙂

~George

Unconditional support continues…

Posted on by George Mahfouz

The Federal Reserve’s incessant support of asset prices continues to propel stocks to all time highs. The S&P 500 (chart) closed out the month of April at a record high of 1597.57. For the month, the Dow Jones Industrial Average (chart) closed up 1.79%, the Nasdaq (chart) +1.88% and the small-cap Russell 2000 (chart) finished the month gaining about 1%. Records are being broken despite the lackluster job growth in our country, a weaker than expected GDP report issued last Friday, and a mixed bag of Q1 corporate earnings reports.

Not to sound like a broken record, but as long as the economy stays stuck in neutral, QE3 should remain in full effect, which is what I expect to hear when the Federal Reserve concludes their two day meeting this afternoon. This mantra should also continue to be bullish for stocks and act as a catalyst for support should we get the pullback or market correction that the bears have been chatting up all year long. To add even more fuel to the fire, you now have central banks from around the world opening up their balance sheets in further support of their own economies. I am not so sure that the old adage of “sell in May and go away” will apply this year just from the mere power and seemingly collaborative efforts of the world wide central bankers. Logically, this cannot continue to be the case, but for now it is super charging the markets.

Technically speaking and from a relative strength perspective, the four key indices are below the 70 value level of the RSI which is considered overbought territory, and therefore could very well be consolidating for the next leg up. Of course, the market is way overdue for some type of pullback. I have been expecting this for months now and whenever there is any type of selling pressure, it has been met with undeniable support. Best of luck in the month of May and remember it is typically a good idea to use protective stops in any position you enter into especially with the amazing double digit run stocks have had so far this year.

Have a great May 🙂

~George

 

 

Flat week…

Posted on by George Mahfouz

The four key indices finished the week basically unchanged, however, after the run stocks have had so far this year, the bulls will take it. For the week, the Dow Jones Industrial Average (chart) finished lower by 0.08%, the Nasdaq (chart) by -0.06%, the S&P 500 (chart) and the Russell 2000 (chart) actually ticked up on the week by 0.12% and 1.04% respectively.

The bears must be scratching their heads and asking; “Where is the pullback or 5-10% correction?” Without question the market has been churning and consolidating for the past several trading sessions and if  you have been short, or have been putting on new short positions, there may be a need for concern. My expectations have been calling for some type of pullback which in fact would be healthy for stocks. However, one thing I have learned over the years is you cannot fight the tape or for that matter, the fed. As long as you have the Federal Reserve commiting and deploying an exorbitant amount of resources and liquidity to the markets, you will most likely have a bid underneath most equities.

Technically speaking, the major indexes remain in overbought territory and when there is a pullback or correction in the averages, I would expect it will be met with willing and able buyers. Good luck to all.

The markets are closed on Monday for President’s Day so enjoy the extended holiday weekend 🙂

~George Mahfouz

Stimulus to continue…

Posted on by George Mahfouz

Stocks finished the week modestly lower despite the Federal Reserve extending its commitment to keep interest rates near zero. For the week, the Dow Jones Industrial Average (chart) closed lower by 20.12 points, the Nasdaq (chart) -6.71 points, the S&P 500 (chart) -4.49 points and the small-cap Russell 2000 (chart) was one of the sole indexes that managed to eke out a gain finishing the week up 1.48 points.

On Wednesday the central bank enhanced its accommodative policies by now tying the near zero interest rate environment to the unemployment rate vowing that interest rates will not increase until the unemployment rate in our country moves down to 6.5%. I think this creative move surprised most economists for never before has interest rates been directly tied to the unemployment rate. However, the market reaction was less than impressive to latest addition that the Fed made to its policy. My beleif is that until we get some sort of deal out of Washington on the fiscal cliff, not too much will be able to move the needle on these markets. That said, once we have clarity on the fiscal cliff dilemma, I will continue respect the power of the central bank and its ability to remain a significant force in our economy and our markets. In the meantime I will pay close attention to how the market action looks vis-a’vis the technicals on the key indices, and will be ready to deploy a long bias strategy once the coast is clear, Good luck to all.

Have a great weekend 🙂

~George

Is this a sign of things to come?

Posted on by George Mahfouz

Stocks flew out of the gate yesterday thanks in part to a stronger than expected ISM manufacturing report. After the report was released, the Dow Jones Industrial Average (chart) was up over 150 points, then pared its gains closing the day up only 70. This morning stocks are mainly lower trading in a narrow range. So now that we are in October and in the final quarter of the trading year, will volatility finally kick in? After two months of tepid volatility and rare August and September market gains, we may just be in store for what most market pundits have been calling for all summer long.

Once again all eyes will be on this Friday’s jobs report to see if there is any sign of meaningful hiring in the private sector. I am not sure how the market will react if hiring remains weak because this might just spur the Federal Reserve to expedite its highly touted stimulus programs. Should that be the case, once again equities most likely will continue to benefit. The challenge I think most traders and investors have is with such a weak economy and corporate profits declining, how can one feel comfortable being long this market? The answer is seemingly a broken record, so long as we have the Fed as our backstop, volatility should create certain buying opportunities. Make sure to always consult a professional financial advisor before implementing any investment strategy. Good luck to all.

~George  🙂