As Promised, Vol Is Back!

We knew it was only a matter of time. After trading in the most narrow range for the better part of the summer the VIX (see chart below) which is the ticker for the Chicago Board Options Exchange Volatility Index spiked this week over 60%!  This on fears that monetary policy changes are forthcoming here in the United States and abroad, especially as it pertains to interest rates. How is this a surprise though? There is not a day that goes by, in fact there is not an hour that goes by without headlines coming out pertaining to the Federal Reserve and what they will or will not do with interest rates.

Look my view is simple, count on it! Count on central banks changing their position on interest rates at some point in time. What amazes me is how much the markets and investors have become so reliant and seemingly make every investment decision based on whether interest rates remain near zero or begin to rise. How about this concept? Take a look at the premiums the markets have enjoyed over the past several years and minus that out. Then in my humble opinion we get back to fair value in stocks and markets. Although this has been one of the most profound bull markets in history, at some point in time equities are going to have to get off of the dependence on central bank accommodations. I look for ward to the day that we will be able to properly evaluate stocks and asset classes based on their respective fundamentals not on Federal Reserve policies.

Until then, the bulls can continue to enjoy the ride they have been on and I will continue to pay close attention to overbought and oversold conditions. With volatility back, this does create opportunity for the trader that is not too concerned with valuations. However, I expect that in the not so distant future, valuations will actually matter again. Good luck to all 🙂


VIX chart George Mahfouz Jr

A pause or a preview?

The key indices had one of their worst performing weeks of the year. For the week, the Dow Jones Industrial Average (chart) fell 2.23%, the Nasdaq (chart) pulled back 1.57%, the S&P 500 (chart) -2.1% and the small-cap Russell 2000 (chart) closed the week down 2.3%. It’s important to note that other than the Dow Jones Industrial Average (chart), the aforementioned other key indexes remained at or above their 50-day moving averages. Stocks reacted to rising interest rates and weak retail sales reported by several retailers including Walmart (NYSE: WMT) which missed on thier earnings as well as providing a somber outlook. Furthermore, bellwether Cisco Systems (NasdaqGS: CSCO) also issued cautious forward guidance during their post earnings release conference call on Wednesday.

So the question now becomes is this a blip on the radar, or a preview of things to come? All year long stocks have been propped up by the most accommodative Fed in history. I also have been writing about the need for top-line growth out of corporate America in order for this bull market to continue. To that point, I have been simply wrong from the standpoint that central banks from around the world continue to pour liquidity into the system and continue to keep interest at or near zero. This policy has taken the emphasis off of how well corporate earnings are actually doing. As Q2 earnings reporting season begins to wind down, there is growing evidence of tepid growth at best, especially in the retail space. Furthermore, the companies that have beat estimates have done so by running a tighter ship and getting more productivity from their current workforce.

Personally, I would like to see how this corrective action plays out over the next few weeks before I am comfortable deploying any long or short strategies in the marketplace. To that end, let’s not forget we are smack in the middle of the dog days of summer, and with most money managers at the beach, volume tends to be very light. Good luck to all.

Have a great weekend 🙂


Will the month of December be jolly for stocks?

Although the key indices finished essentially flat for the month of November, everyone now is asking “will a Santa Claus rally come into effect?” For the month, the Dow Jones Industrial Average (chart) closed lower by 0.55%, the Nasdaq (chart) finished up 1.11%, the S&P 500 (chart) +0.29% and the small-cap Russell 2000 (chart) closed the month up 0.39%.

With the ever increasing rhetoric coming out of Washington regarding the fiscal cliff and whether or not a deal can be made, I am not so sure that we can have a year end rally. Markets hate uncertainty and unfortunately it may take a market swoon for both sides of the aisle and the President to come together on a deal. If this is the case, we could indeed retest the mid-November lows on the S&P 500 (chart) which would be about 70 S&P points from the close on Friday. That said, the markets right now are so sensitive to every word that comes out of Washington, a rally could also occur should there be any positive developments. Most traders embrace this type of environment for it does produce opportunities on the long and short side.

Technically speaking, all of the aforementioned indexes including the transports remain above their respective 200-day moving averages and appear to want to go higher, however, politics and policy do hold the cards as to how we close out the year. Good luck to all.

Have a great weekend 🙂