The Bears Are Baffled!

What is historically one of the weakest months of the year for stocks, the S&P 500 (chart) closed the week and halfway point of the month at an all time high of 2500. The Dow Jones Industrial Average (chart) also closed the week at a record high, along with the tech-focused Nasdaq (chart) and last but not least, the small-cap Russell 2000 (chart) appears to be closing in on a new record high as well.

The bear camp has to be completely exhausted. I mean how in the world can you have the confidence to short this market? Not even the continuation of North Korea’s missile launches can slow down one of the most significant bull markets in history. Now seemingly we need to throw out all traditional metrics, seasonalities, geo-political risks, price to earnings ratios etc. This market has been immune to any risks. I have never seen anything like this. What’s more, there are survey’s out there that indicate that professional investors are the most pessimistic about the markets since before the election. You know what that means? Stocks tend to act the opposite of street sentiment.

Over the years and as most of you know one of my favorite technical indicators and one of the preferred technical indicators of money managers and institutional trader alike is the relative strength indicator. This indicator has been a trusted source to spot overbought and for that matter oversold conditions. The problem I have encountered this year is when indexes or individual equities have reached an overbought condition according to the RSI, the pullbacks that ensue have not provided the proper risk reward to any short thesis. The retracements are so shallow and short-lived that it is not worth putting the trade on. So needless to say, this strategy is on hold for now.

I am not sure what will be the catalyst for stocks or indexes to begin trading on pure fundamentals and not on the oversupply of liquidity and low interest rates. Until then, I will be very cautious in using the traditional metrics and/or technical indicators to base my decisions off of. Good luck to all 🙂

~George

Is Gold Breaking Out?

It certainly appears that way. Gold (see chart below) has caught a meaning bid as of late and it’s about time. The yellow medal has been stuck in a trading range between $1200 and $1300 per ounce for months and now has broke through the $1300 level currently trading around $1330 per ounce. What has surprised me is how long it took for gold to finally go from the left side of the chart to the right. Especially considering the geopolitical risk environment we find ourselves in. That said, stocks are saying what risk? As I write this blog, the Dow Jones Industrial Average (chart), the S&P 500 (chart), the Nasdaq (chart) and the small-cap Russell 2000 (chart) once again are all approaching all time highs. This after a very modest pullback in August. So Wall Street continues to remain in the “buy the dip” mood. All year long and every single time stocks experience any type of pullback, buyers come in and lift the markets to all time highs.

How long can this last? From a technical standpoint the key indices remain below the 70 value level of the relative strength index also referred to as the RSI. The RSI is used as a gauge by certain market technicians to see if whether or not stocks in the short term are overbought or oversold. As as these indexes approach all-time highs and should they breakthrough those highs, these markets can and should continue to go higher. However, if they do not breakout here, then one could expect yet another pullback especially as we are now in one of the more underperforming months for equites of the year. Historically September and October for that matter tends to be a difficult time for the markets. However, based on what we have witnessed all year long despite the ongoing geopolitical risks and with interest rates on the rise, the markets may not care about the seasonality trends of September and October. Good luck to all and both Paula and I wish everyone a safe and relaxing Labor Day Weekend 🙂

~George

Gold chart - Paula Mahfouz