Month: November 2013

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

Stocks and Indexes Continue to Set Records!

Posted on by George Mahfouz

The month of October proved to be yet another record setter with a number of stocks from a variety of sectors hitting all time highs and the S&P 500 (chart) setting a new record high of 1775.22 on Wednesday. The Dow Jones Industrial Average (chart), the Nasdaq (chart) and the small-cap Russell 2000 (chart) all hit 52 week highs as well on Wednesday. This seemingly unstoppable bull run is unprecedented with gains of over 20% on most of the key indices year to date. I think it is fair to say a pause is overdue and would most likely be very healthy for the overall market.

In last month’s opening blog, I discussed how selling options premium can be beneficial in times of increased volatility, and in particular the “covered call” strategy. Today I would like to cover “selling puts” as a way to create options premium income. Unlike the “covered call” strategy where you must own the underlying security in order to “write or sell” a covered call, selling a put does not require you to own the security. However, by selling a put, you are potentially obligated to purchase the security should it close below the strike price you chose on its expiration day.

Let’s look at an example of selling a put on a given stock and like last month I will use Facebook (NasdaqGS: FB) as the example. Facebook is currently trading around $50 dollars a share. In looking at the options chain on Facebook and its current pricing, the December $48 puts are bidding around $2.00 dollars per contract. If an investor were to sell 10 December $48 dollar puts on Facebook for $2.00 per contract, that investor would bring in $2,000 dollars in premium less transactions costs. If Facebook closes above $48.00 dollars a share on expiration Friday in December, the investor would keep the entire premium he collected. However, by selling the 10 put option contracts, the investor has the obligation to purchase 1000 shares of Facebook should Facebook close below $48.00 per share on expiration Friday in December. It’s important to note that before considering and implementing a “selling put” strategy you must be willing to own the stock at the strike price you sold the puts on and in this Facebook example, that would be $48.00. However, your cost basis would not be $48.00 because you received $2.00 in premium when you sold the puts, therefore, your cost basis would be $46.00 per share less transactions costs.

Please also note this is not a recommendation to sell puts on Facebook or any other asset or index. This is merely another example of how an investor can capitalize on selling options premium. In closing and as I always suggest, please consult with a certified financial planner(s) before making any investment decisions.

Have a great weekend 🙂

~George