Volatility Wakes Up!

After weeks of tepid volatility (chart)  investors and markets appear a bit jittery with volatility waking up. For the week, the Dow Jones Industrial Average (chart) closed down 1.3%, the tech-focused Nasdaq (chart) closed off 2.7%, the S&P 500 (chart) closed lower by 1.3% and the small-cap Russell 2000 (chart) finished lower on the week by 1.4%. As first quarter earnings reporting season begins to wind down with overall results coming in mixed, we now enter a time of year where weakness in stocks can occur with volatility even more prevalent. The old adage “sell in May and go away” could come into play.

The currents risks to the market as I see it is the market itself as valuations are historically high with the S&P 500 price to earnings ratio trading in the 20’s. Another risk to stocks is the possibility of the Fed raising rates in June.  These catalysts alone could be all that it takes for equities to not only pause but to continue to experience increased volatility as we head into the summer months. So now let’s look at the technical shape of the aforementioned indexes. After trading near or in overbought territory for the past month or so the Dow Jones Industrial Average (chart) broke through its 20-day moving average, the S&P 500 (chart) also broke through its 20-day moving average, however, a bit more troublesome is the Nasdaq (chart)  as it has broke through its 200-day moving average this past week, a moving average that is more closely watched. Finally, the small-cap Russell 2000 (chart) is now sitting right at its 20-day and 200-day moving averages. So the technical shape of the markets at least according to moving averages support lines appear to be breaking down a bit.

So as we head into a typically softer time for equities that is May and June, and considering the current technical shape of the markets, both Paula and I feel it would be best to move to the sidelines and see if the current increase in volatility continues or if this is just a pause in the sharp rally we have seen since the middle of February.

Good luck to all 🙂


A Weak Week For Stocks…

Stocks closed out the final week of May on a softer note with the Dow Jones Industrial Average (chart) falling 221.34 points, the Nasdaq (chart) lost 19.33 points, the S&P 500 (chart) -18.67 points and the small-cap Russell 2000 (chart) closed the week lower by 5.69 points. Considering the record closing highs that have been set over the past month or so, its no surprise that equities took a bit of a breather.

Now that we are in the month of June, let’s see if this seemingly temporary pause turns into something more meaningful. The month of June historically is a unfavorable month for stocks and this year may be no different. In fact, in this trading week headline risks are abound. Internationally speaking, without a doubt Greece’s debt talks will continue to grab the attention of investors this week as well as the ECB’s central bank meeting. Here in the states, traders will continue to pay attention to the continuing strength of our dollar as well as May’s jobs report at the end of the week. As you can see there are plenty of catalysts that could become market moving events.

Technically speaking, the aforementioned indexes are finding support at their respective 50-day moving averages and none of these indices are in overbought or oversold territory according to the relative strength index (RSI). One technical point I do want to make is when stocks were setting records earlier in May, the volumes associated with those records were on the lighter side. As mentioned in my previous blog, my preference would of been to see these records being set with much stronger volume.

Have a great week and good luck in the month of June 🙂


Late April Sell-Off Wakes Up The Bears…

Stocks sold off sharply on the last trading day of April. The Dow Jones Industrial Average (chart) fell 195 points, the Nasdaq (chart) closed down 82.22 points, the S&P 500 (chart) lost 21.34 points and the small-cap Russell 2000 (chart) finished lower by 26.83 points. The biotech sector has lead the charge in this most recent selloff with the most popular biotech ETF (Symbol: IBB) (chart) losing over 10 percent of its value since mid-March. Another factor in this sell-off is the sloppy earnings reporting season we find ourselves in. Just this week both Twitter (NYSE: TWTR) and Linkedin (NYSE: LNKD) surprised the street with their weak quarterly results and even weaker forward guidance. So the selling pressure is not just in the biotech space, it has now spilt over to the technology sector as a whole. That said, this morning there may be a bit of a respite with the futures market pointing up sharply.

Let’s take a look at the technical shape of the markets as we now enter into May. One troubling sign is the four major averages mentioned above have all breached their 50-day moving average line, with the small-cap Russell 2000 falling prominently below it. Let’s see if these key indices remain below this popular technical indicator for more than a few days. A one day breach does not necessarily mean a total technical breakdown however, another slight concern of mine is that these averages are not oversold yet according to the relative strength index or the RSI. Click here for the definition of the RSI. Now take a look at the charts of the Dow (chart), Nasdaq (chart), S&P 500 (chart) and the Russell 2000 (chart) and you will see at the very top of the chart the plot of the relative strength index and you will further see that these indexes have more room to go to reach the 30 value level of the RSI, which is the level that qualifies an oversold condition. Now throw into the mix that May is historically a weak month for equities and we indeed be in for some additional selling pressure.

In closing, I will re-visit the technical make-up of the markets in mid-May and see where there could be some buying opportunities. Good luck to all 🙂


Where are they now?

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 🙂