January 2017 - Ninth Inning Investments

Earnings reporting season begins in earnest this week which could play a role in determining whether or not the bull market has more room to run. This past Friday the money center banks kicked off the reporting season as JP Morgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) recorded eye popping profits while Wells Fargo (NYSE: WFC) continues to deal with the aftermath of the “fake-accounts” debacle that rocked the bank last year.

As I look at the charts of the key indexes, I do see a potential technical catalyst looming. The Dow Jones Industrial Average (chart), the S&P 500 (chart) and the small-cap Russell 2000 (chart) all share similar and current chart patterns. Over the past month or so, these key indices have been consolidating and trading in a tight range and when you have a looming catalyst such as earnings reporting season, most likely this pattern will breakout or breakdown. The Nasdaq (chart) does not fit this consolidation profile yet as it has been making new highs and leading the pack so far this year. Another technical set-up I look for is overbought or oversold conditions. Seemingly we have been in overbought conditions since the election but technically we are not according to the relative strength index also known as the RSI.

In my previous blog I did write about my expectation of increased volatility as we headed into January and earnings reporting season and how to hedge yourself against such volatility. To my surprise, vol has remained relatively low so far, however, there are catalysts looming as described above. As far as protecting a portfolio against any future volatility, there are many ways to do so but the most effective and simplest way is to buy S&P 500 puts. Especially while vol is low and premiums are relatively cheap. So if you have a “long only” portfolio buying some protection in the form of S&P 500 put options might not be a bad idea. Of course it is always best to consult a certified financial planner(s) before making any investment decisions or any adjustments to your current portfolio. My goal is to bring light to strategies that can be helpful to you that certain managers might not cover.

Good luck to all 🙂

~George

Happy New Year to all and what a year of celebration for the bulls in 2016. The major averages last year notched very impressive gains. The Dow Jones Industrial Average (see chart below) finished the year up 2,337 points or 13.42%, the tech focused Nasdaq (click here for chart) closed up on the year 376 points or 7.5%, the S&P 500 (click here for chart) closed up 194 points or 9.54% and the small-cap Russell 2000 (see chart below) finished out 2016 up a whopping 221 points or almost a 20% gain outperforming most benchmarks. This eye-popping rally really kicked into high gear after the stunning upset victory Donald Trump pulled off over Hillary Clinton in the presidential election. So that was last year, now let’s take a look at 2017 and what lies ahead.

I begin with the obvious. Markets are certainly overbought and have been since the November 8th election results. Then in December, the Federal Reserve raised interest rates for the first time in a year and then added language for an additional rate hike in 2017 to bring the total projected rate hikes this year to at least three. Historically a rising interest rate environment puts pressure on equities and in particular the high beta names. Consensus has it that the Fed will move slowly to avoid any shocks to the economy or the markets. However, with Donald Trump’s proposed economic pro-growth policies, debt and inflation should rise. So I am sure the Federal Reserve will be keeping a close eye on how inflation ticks up as 2017 unfolds. Should inflation rise faster than anticipated this too could be a challenge for the Fed and our stock market.

So based on our current market environment it is my view that volatility will not only pick up in January but the recipe described above signals potential elevated volatility throughout the year. We also will begin to hear from corporate America this month as we head into earnings reporting season. I would expect earnings from multi-national companies to be a bit challenged due to the continuing and significant strength that the U.S. dollar has been exhibiting. That said, there will be opportunities abound in this new year but I am preparing to embrace volatility and hedge my positions going forward. In my next blog I will talk about hedging strategies in order to offset the impact of potential increased vol. Until then, both Paula and I wish everyone the happiest and healthiest new year to all. 🙂

~George

Dow Jones chart Paula Mahfouz Russell 2000 post george mahfouz jr

Ninth Inning Investments

Month: January 2017

Earnings Take Center Stage…

Happy New Year!