Are The Indexes Out Of Balance?

With how hot tech stocks have been lately, one has to ask are the key indexes out of balance? Let’s take a look. It is no secret tech stocks have been on fire, the Nasdaq Composite (see chart here) has been setting records weekly. Stocks like Tesla, Apple and Amazon continue to set all time highs. Price to earnings ratios aka the P/E ratio are also expanding to levels not seen since the tech bubble of the early 2000’s. I am not suggesting that tech as a whole is in a bubble, but there can be an argument that certain tech stocks are. I am not singling out Tesla at all, but what I am highlighting is the company’s eye-popping 1000 + P/E ratio. The price to earnings ratio is a metric for valuing a company that measures its current share price to its earnings per share. For example the S&P 500 typically trades in the 15-20 P/E range. Yes, a 15 to 20 P/E multiple is the historic price to earnings multiple that the S&P 500 trades at. So when you look at Tesla and see that this company’s P/E ratio is currently over 1000, it does bring pause and perspective into the mix.

Back to the indexes that appear to be out of balance. As the S&P 500 (see chart here) and the Nasdaq Composite (see chart below) continue to set records, the majority of stocks have not returned to their pre COVID highs and still remain down on the year. This to me is something to pay attention to. Sure, some tech stocks deserve their current valuations due to how they are growing and benefiting from the widespread lockdowns. Tech stocks and the technologies they provide are serving businesses and consumers alike in a way no one would of thought of before the pandemic took hold of our country. However, even stocks like Apple have high seen quite the expansion of its P/E multiple which is currently trading at 39. Bottom line for me, as we are setting records each week, I would prefer to see a broader base rally to ensure that we are not out of balance with each and every record that is being set.

Good luck to all 🙂

~George

Are The Indexes Out Of Balance? - Paula Mahfouz

 

 

Big Tech Blowout!

Big tech steals the show with blowout earnings results. Apple (NasdaqGS: AAPL), Amazon (NasdaqGS: AMZN) and Facebook (NasdaqGS: FB) all took the street by surprise with their upside earnings reports. For Apple, in addition to their blowout earnings, the company announced a 4-1stock split. This was more than enough for Apple to close up over 10% yesterday at an all time high of $425.04. Apple’s earnings came in over $2.00 per share on revenues just shy of $60 billion. Stunning numbers considering the backdrop that our country is currently in. When I look at what Amazon did, I am equally if not more impressed especially with how they grew their revenues. It’s hard to believe a company of this size grew their revenues 40% to almost $90 billion on the quarter. Without question Amazon has benefited more than any other company due to the pandemic. Consumers have flocked to online shopping more now than ever. Last but not least, let’s look at what Facebook did. Despite experiencing ad boycotts by some of the biggest brands in the world, Facebook managed to grow ad revenues by over 10% and grew earnings by almost 100%. I don’t think anyone expected these type of quarterly results from this group with all things considered.

Let’s take a gander at the major averages and how they are looking from a technical standpoint. The Dow Jones Industrial Average (see chart here) closed the week at 26428.32. When I look at the chart of the Dow, this index is not overbought according to the (RSI) and the Dow closed right around its 20-day and 200-day moving averages. The S&P 500 (see chart here) closed at 3271.12 and this index bounced off of its 20-day moving average with perfection. The Nasdaq Composite (see chart here) has been the big winner so far this year and technically speaking this index could potentially keep running. Heck, i’d be ok if it paused and consolidated a bit because of the run its been on. The other index that I keep an eye on is the small-cap Russell 2000 (see chart below). Speaking of consolidation, that is what appears to be happening with the Russell 2000. This index has been trading sideways for the past week or so and is trading consistently above its 20 and 200-day moving averages during this consolidation period. So all in all the aforementioned indexes appear to be on solid ground from a technical analysis standpoint.

In closing, despite the current shape of the market, the month of August historically tends to be a volatile month. Couple this with the upcoming Presidential election and we could be in for a wild ride between now and election day.

Good luck to all 🙂

~George

Big Tech Blowout - Paula Mahfouz

The Best Quarter For The Major Averages In Decades!

We just witnessed the best quarter in the major averages in decades. Yes folks it is hard to believe that stocks are performing the in way that they are with all things considered. The Dow Jones Industrial Average (see chart here) is trading near the 26,000 level, the S&P 500 (see chart here) is trading this morning at the 3,120 level, the Nasdaq Composite (see chart here) is back over the 10,000 mark and the small-cap Russell 2000 (see chart here) is trading in the 1,450 zone.

The strength of stocks in general is one for the ages. I don’t think anyone would of thought that the markets would continue to show this type of resilience especially with the backdrop of our current unemployment picture and with Covid continuing to run rampant. The only logical reason as to why the Dow Jones Industrial average is not sub 20,000, has to be the continuing liquidity that is coming into the markets provided by Federal Reserve and the government stimulus packages that have launched since the crisis began. Of course there are select tech and pharmaceutical companies that are directly benefiting from the new world we find ourselves but I didn’t expect to see such a wide swath of stocks doing well in this current environment.

Now that the 3rd quarter of the year has begun I think all eyes will begin to focus on second quarter earnings results which kicks off next week. What’s even more important in my eyes is the energy, spirit and guidance that comes out of companies during their earnings conference calls. I am expecting companies to either pull their future guidance or lower earnings expectations, we shall see. Another catalyst that I expect to play a role in how the markets will fare here in Q3 is how the Presidential polls continue to unfold. Currently Joe Biden has a double digit lead over Donald Trump. Some pundits are saying that the markets are beginning to price in a Biden win. Candidate Biden has already stated that he will raise the capital gains and corporate taxes should he become President. If this is the case, higher taxes would negatively affect net earnings but this scenario could be offset by other positive geo-political factors should Biden win.

Good luck to all 🙂

~George

A Breakout Or A Fake-out?

The major averages seemingly are on the verge of a breakout, or could it be a fake-out? The Dow Jones Industrial Average (see chart here) has recaptured the 25000 level. The S&P 500 (see chart here) has recaptured the 3000 level. The Nasdaq Composite (see chart here) believe it or not is in striking distance of its all-time high and the small-cap Russell 2000 (see chart below) is also setting up for a breakout on its own. It is beyond impressive how the markets have come roaring back since late February. There are certain pundits out there that believe that this is a classic bear market rally however to me it feels like more than that. I have to believe that one of the main reasons why stocks have come roaring back in such a short period of time is the $ trillions of dollars in liquidity that the Federal Reserve and our government has injected into the markets and the economy. In fact, the Federal Reserve has quietly indicated that it is possible that they themselves would buy stocks if needed. Talk about establishing a floor in the stock market!

Another key development in the markets is how strong the technicals look right now. Without a doubt the leadership group of this recent rally is the Nasdaq Composite (see chart here). Tech stocks have benefited the most due to the lockdown. There are more people online than ever before, hence more sales accordingly. Since mid-April, not only has the Nasdaq cleared its 200-day moving average, it also has cleared its 50, 100 and 20-day moving averages. So now the Nasdaq is trading above all of its key moving averages which is bullish. Furthermore, the Dow Jones Industrial Average (see chart here) the S&P 500 (see chart here) and the small-cap Russell 2000 have also broken above some key technical resistance levels. Another technical indicator I look at the relative strength index also known as the RSI. At this point in time the aforementioned indexes are not in overbought territory. The RSI is a momentum indicator and when the value level of the RSI goes above 70 stocks or indexes begin to become overbought. This is currently not the case.

Good luck to all 🙂

~George

A Breakout Or A Fake-out - Paula Mahfouz

 

A Stunning Comeback!

Stocks pulled off one of the most stunning comebacks in recent memory. Despite Covid-19’s rapid acceleration which is afflicting millions, the stock market made one of the sharpest and quickest recoveries off of the bottom we hit in late March. The Dow Jones Industrial Average (see chart here) gained over 11% in April, the S&P 500 (see chart below) posted a 12.7% gain, the Nasdaq Composite (see chart here) closed up over 15% and the small-cap Russell 2000 (see chart here) posted a whopping 22% gain in the month of April. Let’s not forget we are still off of the all time highs set earlier in the year but I don’t think anyone expected the magnitude of the rally that we just witnessed. There is no question that hopes of re-opening the economy and the latest advancements on therapeutic treatments and vaccines also played a role in the April rally.

Let’s look at it deeper than the just scientific advancements. The Federal Reserve actions and the recent stimulus packages issued by our government has also played a significant role in the eye-popping rally. With all of constant news flow and developments that comes out on Covid, I do think it is hard to realize how impactful the government stimulus packages and the new Federal Reserve stance is and what it does mean to the economy and markets now and going forward. I think it is fair to assume that once there is a definitive and stabilizing solution for the Covid crisis, that our economy and markets should have no problem taking off again. Until then, let’s all pray for a rapid solution to this ugly virus that has wreaked havoc on society. I do believe and have always believed in humanity and for science to lead the way.

Let’s take a quick look at the current technical shape of the the key indexes. We can all expect the markets to pull back after such a sharp bounce back rally. This is the case as I write my blog today. The markets are pulling back to their 20-day moving averages. Typically the 20-day, 50-day and especially the 200-day moving average acts as near term support levels. Let’s see if the current 20-day moving average holds as a near term support level as we head into the weekend.

Good luck to all 🙂

~George

A Stunning Comeback - Paula Mahfouz

 

 

THE Black Swan Event!

Albeit extremely rare, the Black Swan Event of our lifetime has occurred. Our world has experienced shocks in the past but nothing like what we are seeing today, at least from a humanitarian standpoint.

Whether it was the crash of 1987, the savings and loan crisis in the early 90’s, the dot-com bubble, none of these storms pale in comparison to the scope and breadth of COVID-19. Of course 9-11 was an extremely tragic moment and event in time which we can compare and which also affected 1000’s of people from around the globe. We will never forget the men and women who lost their lives and the first responders who served in the 9-11 tragedy. The same rings true today, we will never forget the people who have lost their lives and the ones that have been stricken with this unprecedented disease. We also cannot be thankful enough to the men and women who are serving the front lines today in attempt to save peoples lives and who are treating the sick.

My thoughts and prayers go out to all and I also pray that everyone joins in to not only help where they can, but to also follow the guidelines of self isolation and social distancing. Please follow these critical rules and guidelines.

There will be no market analysis or market opinions today.

~George

 

A Week To Forget…

Certainly, a week to forget! Not since the depths of the 2008 financial crisis have we seen volatility so high (see chart here) as stocks and indexes react to the spread of the coronavirus. Last week, the Dow Jones Industrial Average (see chart here) saw multi-thousand point swings. The S&P 500 (see chart here) was not spared from the highest volatility in a decade. The Nasdaq Composite (see chart here) and the small-cap Russell 2000 (see chart here) both experienced eye-popping swings as well. However, on Friday the President declared a national emergency and he announced a $50B relief package to combat the coronavirus. Stocks took that cue and had one of their best day’s ever with the Dow Jones Industrial Average (chart) soaring almost 2000 points, the S&P 500 (chart), the Nasdaq Composite (chart) and the Russell 2000 (chart) all gaining almost 10% on the day.

Now we find ourselves in a highly volatile environment that in my opinion won’t abate until more metrics come forward pertaining to the spread here in the U.S. and the plans to contain it. The administration took a huge step yesterday by declaring a national emergency and to promise the full resources of the government to combat and control this virus. Furthermore, the government is waiving interest rates on student loans and committed to buying oil from U.S. companies to “fill up our strategic reserves”. It’s no wonder stocks had one of their best days in history.

I always like to conclude my blogs with a take on the technical shape of the key indexes. Needless to say there was a lot of technical damage done last week pertaining to technical makeup over the markets and in particular the moving averages. All of the major indices broke their respective 20-day, 100 and 200-day moving averages. These are all significant support zones that have been broken through. The one bright spot in this dynamic is the selling was so severe that after the dust settles strong rallies can and do typically occur as we witnessed on Friday. We are also now way below the key moving averages that often times the markets go back to retest those averages. If this does occur the set-up is very promising for bargain hunters. That said, I am not suggesting that the markets will rip roar back anytime soon, but historically strong rallies do occur after panic selloffs.

Good luck to all 🙂

~George

Fear Of A Global Pandemic Grips Markets!

Stocks went into a tailspin as fear of a global pandemic grips the markets! New outbreak clusters of the highly contagious coronavirus are beginning to surface which is pressuring leaders from around the world to act and act more aggressively. Stocks have also entered correction territory as companies and analysts begin to ratchet down their revenue and earning forecasts. Over the past week or so the Dow Jones Industrial Average (see chart here) has lost over 10% in the past week alone, the S&P 500 (see chart here) has also entered into correction mode, the Nasdaq Composite (see chart here) has been hit hard and the small-cap Russell 2000 (see chart here) is also witnessing a sharp sell-off.

Personally I believe a correction was needed because of how robotic the markets have acted. Stocks no matter what risks were out there behaved in a way never before seen. We have been in the strongest bull market ever and nothing over the past 12 years could slow this bull market down. Now I am not happy that it is a global health risk that’s the catalyst to put stocks in correction mode, but nonetheless this is where we find ourselves. Of course when fear is rampant in any market this is where opportunity can be found. I am not suggesting to jump in here because as we all know fear and/or greed can be excessive and markets tend to over do it when emotions take the lead over rational thinking. So when we get overextended to the upside or downside the first thing I look at is how the technicals look during extreme market moves.

When I now look at the technical shape of the markets at least at it pertains to the moving averages things do not look so good. The Dow Jones Industrial Average (see chart here), the S&P 500 (see chart here) and the Russell 2000 (see chart here) have all breached their 20-day, 100-day and 200-day moving averages which are all seen as major support zones especially the 200-day. The Nasdaq Composite (see chart here) is the only major index that has yet to close below its 200-day. That said, all of the aforementioned indexes are oversold according to the relative strength index (RSI) which when we see the 20 value level hit on any stock or index, snap back rallies can and do occur. This type of market is great for traders if you are experienced enough to trade off of technicals, however for investors that have a long term view these type of market environments requires a lot of patience and keeping the emotions at bay. Let’s all hope that the spread of the coronavirus abates and that a vaccine becomes available as quickly as possible.

Good luck to all 🙂

~ George

Tesla Follows SpaceX…

Tesla follows SpaceX right into space! Tesla’s stock that is! (Nasdaq:TSLA). I am not sure if even Elon Musk thought that Tesla’s stock price would almost hit $1000 per share (see chart below) before its fundamentals warrant it. That’s right folks on February 4th Tesla hit an all-time high of $968.99 with an astounding parabolic move. This kind of stock behavior reminds me of the dot-com days where companies were trading in nose bleed territory without the fundamental backdrop to support the valuation. That said, without question the extremely large short position that has been put on Tesla has played a major role in the stock price spike. Tesla has long been one of the most shorted stocks on the Nasdaq which when stocks breakout of a trading range such as what happened to Tesla, and also having a significant short interest against it, then it’s the perfect set up for a major parabolic move.

With the stock still trading north of $800 per share, the company is not missing out on their next financing. To close the week out, Telsa took advantage of their recent stock price surge to price a $2 Billion secondary offering at $767 per share. I mean brilliant move for a company that continues to experience sporadic growth and still demands cash in order to hit their objectives. The potential problem I see is how can the Tesla a stock hold up at this crazy valuation? No question the short sellers covering their positions was a big part of this recent parabolic move. So the question now is who and what will drive the price higher? What’s more is who and what is going to support a $150 Billion dollar valuation? There are some analysts that are on their soapboxes with new buy recommendations and new target prices in the $1,000’s. So just maybe this will be enough to keep the stock up until the company catches up to its current valuation.

Good luck to all 🙂

~George

Tesla Follows SpaceX - Paula Mahfouz

 

Coronavirus Hits Stocks!

The coronavirus hit stocks and major indexes this week as fear grips investors. The Dow Jones Industrial Average (see chart here) fell over 600 points yesterday, the S&P 500 (see chart here) closed lower by 58 points, the Nasdaq Composite (see chart here) fell 148 points and the small-cap Russell 2000 (see chart here) closed yesterday down 34 points. Now if you have been following me for a while you know I am a big fan of pullbacks in the market. However, I don’t like seeing the cause of this latest sell-off. I would much rather prefer to see the market retrace in a healthy manner versus a health crisis.

Some of the fear the market is experiencing is warranted. Companies are suspending business to and with China which clearly will have an impact on their businesses.  For example airline stocks have taken it on the chin recently. Most major airlines have suspended service to China and in some instances for months. Entertainment companies such as Disney (DIS:NYSE), Carnival Cruises (CCL:NYSE) and Royal Caribbean (RCL:NYSE) are also feeling the pressure due to closures and suspension of services. These companies and companies alike are doing the responsible thing here until the World Health Organization establishes the proper plan to contain the spread of this fast moving virus.

To that end, yes the coronavirus is a global threat for now. Past viruses such as the coronavirus are serious health risks and this one is no different. However, for market participants past events like this have ended up being opportunities in the marketplace. Of course the highest priority here is to not only stop the spread of the virus, but to find a swift treatment for it. Until then I do expect continuing volatility in the markets.

In the short term my plan is to be patient and not to act in haste. Historically when situations like this occur and then move to a respite, markets begin to settle in. Good luck to all 🙂

~George