markets

A Respite From The Sell-Off!

Posted on by George Mahfouz

Stocks snapped back sharply on Friday after a week of relentless selling pressure. On Friday the Dow Jones Industrial Average (chart), surged 313.66 points, the Nasdaq (chart) popped 70.67 points, the S&P 500 (chart) notched a gain of 35.70 points and the small-cap Russell 2000 (chart) closed Friday out up 18.27 points. For most of last week the markets were under tremendous pressure as oil continued to plummet along with bank stocks. On Thursday U.S. crude oil closed at a 13-year low only to snap back on Friday gaining over 12%. One of the reasons why oil has bounced off of multi-year lows is a rumor was floating around that the Organization of Petroleum Exporting Countries aka O.P.E.C. was prepared to cut production. We will see if this becomes the case. Furthermore, the European banks have been sold off ruthlessly all year long which has indeed carried over to our banks here at home. So when you have both oil and banks selling off the way that they have, it’s no wonder why there has been a global sell-off sending markets into correction territory.

As the global sell-off continues and as the chatter of doomsday gets louder and louder, I think it is important to remember that we have been in one of the strongest and longest bull markets of all time. Let’s not forget it is not only normal but quite healthy that stocks, bonds and commodities correct and balance out. It amazes me that when sell-offs occur that lead to corrections in the marketplace how the pundits come out of the woodwork and speak to how the world is coming to an end. My friends, what hasn’t been normal is for over six years how we have not had a market correction of over 10% that has stuck. Well here we are today and this is where we find ourselves.

Yes, equities can go lower and yes it can get more painful. But once valuations become attractive again and this is what market corrections provide, you better believe at some point in time buyers will resurface and take advantage of the what goes on sale. The markets are closed on Monday due to Presidents’ Day. Both Paula and I wish everyone a very safe and happy holiday 🙂

~George

 

Despite A Month End Rally, Stocks Took It On The Chin!

Posted on by George Mahfouz

January proved to be one of the toughest months for stocks in years. The Dow Jones Industrial Average (chart) closed the month down 5.5%, the Nasdaq (chart) closed down 8%, the S&P 500 (chart) fell 5.1% and the small-cap Russell 2000 (chart) finished the month out down almost 9%. If it wasn’t for the strong month end rally, both the Nasdaq (chart) and the small-cap Russell 2000 (chart) would of closed out in correction territory. Clearly China and Oil continue to grab the headlines and continue to make investors very nervous. However, on Friday the Bank of Japan in a surprise move implemented negative interest rates for the first time ever in an attempt to aggressively stimulate their struggling economy. So once again a central bank acts and the markets respond. Even our own Federal Reserve stated last Wednesday that they are on high alert pertaining to the global markets and the affects that are being felt here at home. In other words, there may be a pause in raising interest rates here in the U.S.?

That said, what never ceases to amaze me is how technically disciplined the markets can be. If you look at the major averages over the past two weeks you will see that all of these key indices held their August 2015 lows. Especially the Dow (chart) and the Nasdaq (chart) which traded down almost to the nickel to their respective August lows. In my previous blog I cited the Federal Reserve and their policy shift to raising interest rates and the fact that now markets and equities can be assessed on their own merits versus what the central banks may or may not do. Well Friday’s Bank of Japan’s move is a reminder that central banks around the world are ready and capable of intervening at any point in time. Which brings me back to this, how in the world can you confidently have a short thesis in these markets? In my opinion, this model is simply too risky when you have monetary policies that can turn on a dime.

So what’s an investor or trader to do? One thing that stands out to me is throughout all of the noise and chatter is that the technicals continue to perform with the utmost efficiency. Whether markets or equities are overbought or oversold vis-à-vis the relative strength index (RSI) , or support lines are met and hold. No one can deny how disciplined and efficient technical analysis can be.

Good luck to all 🙂

~George

Are Stocks Poised To Breakout?

Posted on by George Mahfouz

After an early November sell-off, the major averages could be on the verge of a breakout, at least from a technical point of view. The noticeable dip in equities that occurred recently was met with strong support and now stocks have rallied up to key resistance levels. The Dow Jones Industrial Average (chart) closed the month of November at 17720, the Nasdaq (chart) closed at 5109, the S&P 500 (chart) closed at 2075 and the small-cap Russell 2000 (chart) closed the month of November at 1198. As you can see by their charts the three top indices have resistance levels of 18,000, 5175 and 2125 respectively while the small-cap Russell 2000 (chart) is seemingly on the verge of breaking out. That said, it takes more than a day or two trading above a resistance level with strong volume to confirm a breakout. What could be in favor for a breakout with all of the aforementioned indexes is the seasonality of the markets a.k.a. the Santa Clause rally. This could very well be the catalyst for a year-end rally.

What could get in the way of a potential Santa Clause rally? One example could be if the technical resistance line(s) holds true to form and the key indices cannot breakout with conviction above these marks . There is also the risk of China’s market continuing to abate as regulators are cracking down on trading practices of major Chinese brokerage firms. The China weakness can spill over here to our shores even if it is only a short-term consequence. Of course there is always a geo-political risk that could weigh in on market sentiment and behavior. And last but not least, the Good Ole Federal Reserve and whether or not they would implement their first rate hike in almost a decade when they meet later this month.

That said and notwithstanding any of these risks, we have seen stocks incredibly resilient during this multi-year bull run and I would not be surprised if we indeed breakout and experience a year-end rally that could challenge the all time highs. Good luck to all 🙂

~George

Rough Quarter For Stocks…

Posted on by George Mahfouz

Although the markets rallied yesterday, the major averages in Q3 closed lower for the second straight month. In fact, year to date the Dow Jones Industrial Average (chart) is down 8.6%, the Nasdaq (chart) is off by 2.5%, the S&P 500 (chart) is lower by 6.8% and the small-cap Russell 2000 (chart) year to date is down 8.6%. So the bulls are asking what gives? My question is more of what has taken so long? The U.S. markets have not seen any kind of meaningful or long lasting correction in six years. This is not a surprise and if anything should be embraced. Stocks have been driven by the Federal Reserve policies ever since the introduction of the first quantitative easing mandate. How easy has this market been? All any investor or fund manager really had to do over the past 6 years is buy and hold with no need for concern. I think it’s safe to say the landscape is changing and rightfully so. There are many investors out there that missed this stunning bull run we have been on simply because it was hard to agree with the valuations that most of the market has enjoyed during the Federal Reserve buyback program and low interest rate stance. Top-line growth has really not been the catalyst that has driven stocks during this incessant bull market. However, when you are in a low to negative interest rate environment there really isn’t any other option to place funds. The question now is are we heading towards or already in a normalized market environment? Meaning will equities now begin to trade on their own merits? To me it certainly feels like the markets are setting up this way.

We won’t have to wait very long because third quarter earnings reporting season is just ahead. Without question I expect this upcoming earnings reporting season will be scrutinized like no other in recent memory. I believe gone are the days that investors will give any company a pass should their results come in under street estimates or even in-line with the street. For me personally there is too much volatility in the marketplace right now and my preference is to go to the sidelines until after Q3 earnings reporting season is over. I will then evaluate the landscape from a fundamental and technical point of view. Speaking of the technical shape of the market, this too of a concern of mine. All of the key indices are in a significant down trend trading well below their respective 200-day moving averages. Yes theses indexes are finding a bit of support right here, but if earnings reporting season doesn’t add up, new 52 week or even multi-year lows could be in the cards? My point here is that with the way the markets look and feel, it is probably best to be a bit more conservative until after we see the health and growth rate of corporate America. Good luck to all 🙂

~George

It’s All About Greece…

Posted on by George Mahfouz

The Greece Crisis is at the forefront of the markets yet again. Greece closed its banks and stock market on Monday in an attempt to avoid on run on their financial institutions. The heightened state of Greece sent our markets into a tailspin on Monday, however the U.S. stock market did find it’s footing yesterday managing to eek out a small gain. For the month of June, the Dow Jones Industrial Average (chart) closed down 391.18 points at 17,691.51, the Nasdaq (chart) finished the month lower by 83.16 points at 4987.00, the S&P 500 (chart) -44.29 points at 2063.11 and the small-cap Russell 2000 (chart) was one of the only major averages that finished the month of June positive closing up 7.42 points on the month at 1253.95.

So what’s in store for the month of July you may ask? One word, Volatility! Since the realization that Greece is going to miss its $1.7 billion dollar debt payment it owes to the International Monetary Fund and that Greece may no longer be a part of the European Union, volatility slammed the global markets. The $VIX (chart) which trades on the Chicago Board Options Exchange is the Volatility Index. The $VIX indicates the market’s expectation of future volatility, 30 days to be exact, spiked as high as 41% since Monday. We have not seen this type of vol for months and I don’t expect it to let up anytime soon.

Although Greece continues to grab the headlines, there are other concerns that contagion can spread to other debt ridden EU countries such as Spain and Portugal. Even Puerto Rico has it’s own debt issues that are of increasing concern. I do expect that there will be a resolution of some sort to this latest crisis, but I also do believe volatility will stick around for a bit.

Another catalyst that could create additional volatility is the upcoming Q2 earnings reporting season. U.S. companies will begin to report their results after the 4th of July holiday and in earnest the week thereafter. So you can see why I believe volatility could be increasing over the next several weeks. As a trader, this is what you have been waiting on and if you are a long term investor, you have been through this before.

Both Paula and I wish everyone a very safe and Happy 4th of July Holiday 🙂

~George

Are You Kidding Apple?

Posted on by George Mahfouz

A $74.6 billion dollar quarter! Simply breathtaking! Apple also generated a record net profit of $18 billion, the highest quarterly net profit ever, for any company. Earnings reporting season is in high gear and no one so far have remotely come close to such an impressive performance. Congratulations Apple! That said, the overall market in the month of January did not fare as well. For the month, the Dow Jones Industrial Average (chart) lost 3.7%, the Nasdaq (chart) pulled back 2.1%, the S&P 500 (chart) retraced 3.1% and the small-cap Russell 2000 (chart) closed the month of January off 3.3%. Note that the majority of the monthly losses occurred in the past trading week. January also experienced a spike in volatility with the CBOE Market Volatility Index also known as the VIX (chart) closing just a tad under 21. The VIX is referred to as the “fear gauge” which shows the market’s expectation of upcoming volatility by calculating implied volatilities of both calls and puts of S&P 500 index options.

Technically speaking, the above key indices are fast approaching their respective 200-day moving averages, especially the Dow Jones Industrials (chart). Remember, the moving averages is amongst the most favorite technical indicator utilized by market technicians, computerized trading models and institutional investors alike. Furthermore, the relative strength index  of the aforementioned key indices are not in oversold conditions. The RSI is another favorite technical indicator of certain market technicians . So should the markets continue to experience an increase in volatility, the 200-day moving average should provide meaningful support as long as earnings reporting season closes out on a high note. I will monitor the technicals of the markets closely and wait to see how the balance of Q4 earnings reporting season plays out. If we test the 200-day moving averages and hold that level, and if earnings continue to come in positively, I would be then be inclined to become more bullish on equities. However, if we breakdown technically and if corporate America begins to show signs of slower growth, we will then be having a different discussion. Good luck to all!

Paula and I wish everyone a Happy Super Bowl Sunday 🙂

~George

Volatility Is Back, Q3 Earnings Reporting Season On Deck…

Posted on by George Mahfouz

After being in hibernation for most of the year, volatility is back at the forefront of the markets. The Volatility Index Symbol: VIX (chart) has spiked about 50% over the past couple of weeks which is a clear indication that investors are starting to get a bit nervous and fearful of the markets. The VIX demonstrates the next 30-day expectation of market volatility by calculating the implied volatilities of both puts and calls options of S&P 500 companies. Even the Dow Jones Industrial Average (chart) have experienced intraday triple digit swings over the past several trading days, something we have not seen in a long time. I think it is safe to say that the increase in vol is due in part to the markets continuing to post record highs, the fact that the federal reserve will be ending its asset purchase program this month and seemingly everyday now headlines of geopolitical uncertainty are abound . Furthermore, with the third quarter of the year now in the books, earnings reporting season is upon us. I don’t think it’s a coincidence that volatility has increased with all of the aforementioned factors in play. In fact, this particular earnings reporting season will  most likely be put under the microscope like no other recent quarter. Stocks have enjoyed the the accommodative policies of the Fed for the past several years and now one of the key components of the stimulus program will end here in October. As I mentioned in my previous blog, it will be up to corporate America to stand on its own two feet and begin to demonstrate top-line growth as they grow their earnings. Over the past couple of years many corporations have grown their bottom line by way of becoming more efficient, reducing their workforce and implementing stock buyback programs. I believe going forward financial engineering and in-house efficiencies won’t be enough to satisfy investors appetites.

As the third quarter ends and technically speaking, the Dow Jones Industrial Average (chart), the Nasdaq (chart), and the S&P 500 (chart) appear to be finding some support at their respective 50-day moving averages, however, the small-cap Russell 2000 (chart) continues to lag the big-caps and trade well below its 50-day and 200-day moving average. That said, what is impressive to me is even though volatility has picked up steam, most every pullback is met with support from willing buyers and sell-offs appear to be short lived. The concern I have is whether or not this pattern of support continues. As mentioned, Q3 earnings reporting season is on deck and I do not believe companies will be given free passes anymore to modest top-line growth. If you are a trader, this is type of environment that you have been waiting for. However, if you are an investor with a longer term view, then it is time to look at the intrinsic value of your holdings to reduce the impact of a higher vol environment. Also, options premiums tend to increase along with higher volatility which could bode well for option sellers. Whatever the case is, as we enter the last quarter of the year, I expect volatiily to continue and at points increase, which could create some panic selling and create great opportunities with the right companies. I am looking forward to this upcoming earnings reporting season and will look for oversold conditions to act.

Have a great October 🙂

~George

 

Bank Stocks Finally Catch A Bid!

Posted on by George Mahfouz

As earnings reporting season kicks into high gear one of the sectors that are surprising investors to the upside are the banks. Citigroup (NYSE: C) started things off yesterday reporting an adjusted earnings per share of $1.24 compared to the $1.05 most analyst’s were anticipating. This earnings beat has lifted Citigroup’s stock over 3% the past two days. This morning Goldman Sachs Group (NYSE: GS) also announced an unexpected profit of $2.04 billion dollars or $4.10 per share while analysts were expecting earnings of $3.05 a share. This beat sent Goldman’s shares up 2% this morning although there could be a short term technical hurdle in the $171.oo range (chart) that GS may face. Back in mid-June, Goldman had a high of $171.08 before losing 5.5%. Goldman’s shares have since rebounded back to the $170 zone. Should GS be able to break through the $170 zone, it could very well test its 52 week high of $181.13. If it cannot break through this short term resistance zone in a meaningful way, then a possible re-test of the mid-June lows could occur (chart). Also reporting this morning before the market opened was JP Morgan Chase (NYSE: JPM). JP Morgan reported an earnings beat of $1.46 compared to $1.29 per share most analysts were expecting. This unexpected earnings beat sent shares of JP Morgan Chase (chart) up more than 2% in early morning trading. Whether or not this is a short term bounce or the beginning of a new trend for the banking sector has yet to be seen. I would suspect that the banking pundits will want to see a widening of yield spreads before they get too bullish.

After the bell, the focus will turn to the tech sector. Both Intel (NasdaqGS: INTC) and Yahoo (NasdaqGS: YHOO) will report their quarterly results. Intel has been on a tear gaining over 20% since mid-May (chart). In my humble opinion, Intel is really going to have to crush their numbers and up forward guidance in order for their stock to keep rising here in the short term. Yahoo on the other hand seems to be trading on what Alibaba’s valuation will come out as when they go public in the near future. Two other bellwether tech stocks Ebay (NasdaqGS: EBAY) and Google (NasdaqGS: GOOGL) will report their quarterly results tomorrow and Thursday respectively. So as you can see there are trading opportunities abound, however, my preference is to wait to see how companies report before making any trading or investment decisions. I do think this earnings reporting season will dictate how the overall markets will fare in the second half of this year. So far so good in this reporting season, but there are hundreds of companies yet to report so let’s not draw any significant conclusions. Also, please remember it is good practice to consult with a certified and trusted financial advisor(s) before making any adjustments to your current portfolio or making any investment decisions for that matter.

Good luck to all 🙂

~George

Where are they now?

Posted on by George Mahfouz

Just a mere 2 weeks ago the pundits came out in full force declaring the end of the bull market or at the very least a 10-20% correction for stocks. Fast forward to today and we find ourselves yet again in record breaking territory. For the month of May, the Dow Jones Industrial Average (chart) closed up 0.82% at a new record closing high of 16,717.17, the Nasdaq (chart) closed the month up 3.11% at 4242.61, the S&P 500 (chart) closed at an all time record high of 1923.57 and the small-cap Russell 2000 (chart) closed out May up 0.68% at 1134.50.

In my previous blog I wrote about certain experts calling for an imminent correction in which I thought was a bit pre-mature considering how the Federal Reserve continues to accommodate the economy and the markets. I understand where the bear camp is coming from, as soon as the Fed begins to hike interest rates, we should indeed see the markets react accordingly. The problem with the sell-side thesis is this just isn’t happening now. Policymakers continue to reiterate their stance on interest rates which are to remain low for the foreseeable future as the bond tapering program continues and ultimately exhausts itself, which could be by year-end. Then I think bear growl may have a lot more punch to it.

So how do we continue to make money in an environment that continues to make record highs seemingly with no end in sight? In addition to honoring the power of the Fed, I will continue to refer to the technical shape of the key indices to spot opportunities as we wait for the second quarter to wind down. With the incessant “melt-up” of the markets, one may think that stocks maybe overbought a bit. This most certainly is the case with select individual stocks, however, as I look at the closely followed Dow (chart), Nasdaq (chart), S&P 500 (chart) and the Russell 2000 (chart), none of these indexes are in overbought territory at least according to their respective Relative Strength Indexes. Remember, the Relative Strength Index (RSI) is a technical indicator which signifies whether or not a stock or index is overbought or oversold, with the 70 plus value level indicating an overbought condition, and the 30 minus level indicating an oversold condition. Click here for the expanded definition of the RSI. In addition, all of the moving averages are intact for the aforementioned indexes. Click here for the moving averages definition.

So as we enter the month of June, I am expecting the continuation of the “melt up” that has occurred so far this year with modest pullbacks. Of course as we witnessed in mid-May, sentiment can change quickly and the pundits and press for that matter can spread fear like wild fire, and should this be the case, I will prepare myself to add to certain long positions to take advantage of any potential weakness. As always, it is best practice to consult with a trusted financial advisor(s) before making any investment decisions. Good luck to all 🙂

~George

 

 

What Correction?

Posted on by George Mahfouz

I think it’s safe to say that the bulls took back control of the stock market, at least for now. After what seemingly was the beginning of a meaningful market correction in late January, stocks closed the month of February at or near record levels. For the month, the Dow Jones Industrial Average (chart) finished up 3.96%, the tech focused Nasdaq (chart) closed up almost 5%, the broad based S&P 500 (chart) closed at a new record high of 1859.45 and was up 4.3% in February, and the small-cap Russell 2000 (chart) finished the month in the green by 4.6%.

So what changed from the apparent sell-off in late January to today? In my view, absolutely nothing. We still have a very accommodative Fed, interest rates remain near zero and a new Fed chairwomen that essentially emulates the former head of the Federal Reserve Ben Bernanke, and his policies. Hence, markets remain flush with cash with no where else to go but into higher yielding assets. This in my humble opinion is why equities snapped back from their January declines and why new highs are occurring. The bears are wondering how much longer can this go on without sparking a potential problematic inflationary environment. The bears are also growling about the bubbly type market we find ourselves in with valuations beginning to get stretched a bit and the apparent stratospheric $19 billion price tag that Facebook (NasdaqGS: FB) recently paid for the 55 employee app company WhatsApp. Then you have electric car maker Tesla this week receiving a price target boost from Morgan Stanley (NYSE: MS) to $320 dollars, which is more than double what Morgan’s previous target price was. Other data supporting the bear thesis is margin interest remains at all time highs and the retail individual investor is coming back to life according to online trading discount brokers TD Ameritrade (NYSE: AMTD) and Charles Schwab (NYSE: SCHW) which are seeing a surge in trading activity. Some pundits argue that this is the type of market behavior that is conducive with market tops. All valid points. My take is both the bulls and bears have valid points, but personally I cannot bet against the power of the central bank and their incessant support of the markets. When and only when the asset purchase program concludes and when interest rates begin to rise, we can then have a different type of discussion.

That said, we can easily see pullbacks and corrective type actions in the marketplace like we witnessed in late January. When volatility does come back, I would expect a similar pattern of market participants coming in looking for potential bargains, and thus placing yet another floor under these markets. On the technical front, it appears that all systems a go with none of the key indices in overbought territory yet according to the Relative Strength Index (RSI) however, yesterday we did see a “quasi-reversal” of sorts in where we closed well below the sessions highs after the S&P 500 (chart) hit an all time intraday high. This reversal was apparently due in large part to the increasing tensions in the Ukraine late Friday afternoon, which is something I will pay close attention to next week.  In closing, whether you are bullish or bearish, make sure to always consider having protective stops in place with your positions which is designed to protect your portfolio against unexpected losses.

Have a great weekend 🙂

~George