Pullback #1

I have been blogging for while now that a pullback at some point is inevitable and would even be healthy considering the parabolic move most of the key indexes and many stocks have had so far this year. However, there seemingly has not been a meaningful catalyst to trigger a noticeable pullback or better yet a healthy 10% correction, until maybe now? Taper talk is back on the table at the highest level since late May thanks to the continuing flow of recent positive economic data. In fact, some pundits predict that the Federal Reserve will begin reducing its asset purchases as early as this upcoming week. This chatter has been enough for the markets to take notice with the Dow Jones Industrial Average (chart) falling 264 points this week or 1.7%, the Nasdaq (chart) retreated by 1.5%, the S&P 500 (chart) gave back 1.6% and the small-cap Russell 2000 (chart) closed the week lower by 2.2%. Now let’s keep this into perspective, these benchmark indices on the year are still up a whopping 20%, 35.5%, 24.5% and 30% respectively.

What everyone has been accustom to for the past couple of years is that the protractive accommodative policies of the central banks from around the world would keep a floor under the markets, which most certainly has been the case. However, in late May of this year there had been widespread speculation that the Fed would indeed begin to reduce its bond buying and mortgage backed security purchases which sent the markets lower by over 5% by late June. The tapering fear at that point became unfounded as the economic data back then was still coming in too skittish in the Fed’s eyes.

Fast forward to today and there may now be enough positive economic data such as Q3¬†GDP coming in at 3.6%, the labor market showing signs of strength, personal spending rising and overall business confidence improving. These signs could be enough for the Fed to slowly reduce its asset purchases. So now the question on all minds is “how will stocks react once the Fed begins to taper?” This subject is currently being highly debated in most circles of the financial world and quite frankly no one knows. I suspect that the Fed will start to taper sooner than later but that they would be very conscious and conservative with their approach and how they signal their future actions. That said, once the central bank removes itself from the limelight and allow the markets to trade in a normal environment and on their own merits, I would expect volatility to get back to normal levels, hence, healthy pullbacks and even corrections should be back on the table. With this type of market environment, both long and short traders would be able to compose strategies based off of fundamentals and have the confidence to act accordingly.

Both Paula and I wish everyone a very safe, healthy and happy holiday season ūüôā

~George

 

Dow 16000+, Nasdaq 4000+, S&P 500 1800+, Russell 2000 1100+! Records Continue to Shatter!!

As we are now in the final month of the trading year, some of the top key indices ¬†continue to set records. For the month on November, the Dow Jones Industrial Average (chart) finished up 3.48% closing at 16086.41, the tech-heavy Nasdaq (chart)¬† was up 3.57% closing the month at a 13 year high of 4059.88, the S&P 500 (chart) advanced¬†2.8% in November closing at a record high of 1805.18 and the small-cap Russell 2000 (chart) closed the month of November up 3.88% at 1142.89, yet another record. I think one of the reasons why the markets continue to lift into year-end is that most pundits do not believe that they can. There is not a day that goes by where “bubble” is not one of the top headlines in print, online or on the tube. That said, in my last blog I¬†highlighted the current technicals of the top key indexes and in particular the Relative Strength Index (RSI) technical indicator. Well in the last two weeks or so both the Dow (chart) and the Nasdaq (chart) have now breached the 70 value level with the S&P 500 (chart) and the Russell 2000 (chart) not too far behind. The 70 value level according to one of the RSI principles is an overbought condition. If you go back historically and analyze what typically happens when an index or equity for that matter enters into an overbought condition, the majority of the time a “reversion to the mean occurs. Now this is not to say that overbought conditions in an index or stock instantly changes course, however, typically¬†at some point in time a¬†reversion does indeed occur. Now with that said, I have seen indexes and stocks remain overbought for weeks and months at a time before a natural reversion occurs, but it’s something to keep an eye on especially if you have long term gains in your portfolio or if you are a trader and have the gumption to consider a short strategy¬†in this parabolic market.

As this broad rally continues and as we are now in overbought conditions in certain key indexes, one has to wonder what will it take for a “reversion to the mean?” to occur? At this point in time in the calendar year, I am not sure? With only one month left to go in 2013 and with third quarter earnings reporting season behind us, a Federal Reserve that continues to be extremely dovish and fund managers year-end window dressing upon us, whatever pullback (if any) that may occur between now and year-end should be met with anxious support. I just do not see any type of a imminent catalyst that would jar these markets significantly, unless some unforeseen macro/geopolitical event happens, which of course is always a possibility. Should an unexpected negative geopolitical event occur, this in my opinion would be one of the only conditions between now and year end that could create a “reversion to the mean” type scenario that most bears have been waiting on.

Good luck to all ūüôā

~George