bond

Back To Setting Records!

Posted on by George Mahfouz

After a tumultuous and volatile month, stocks are back to their old habits. The Dow Jones Industrial Average (chart) and the S&P (chart) 500 both closed at record highs. The month of October also saw the Nasdaq (chart) finish up over 3% and the small-cap Russell 2000 (chart) closed the month out up an eye-popping 6.5%. So as far as the long awaited correction goes, lets take a look. The Dow (chart) from it’s previous all-time high corrected 8.61%, while the S&P 500 (chart) retraced 9.83% by mid-October. Not quite the text book healthy 10% correction most investors were looking for, but close enough. The question I have is, will this snap-back rally to new all-time highs hold? Earnings for the most part have been coming in pretty good, however I have not seen the robust top-line growth you would expect in order to keep setting new records. Nonetheless, easy global monetary policies continue to keep not only a floor under these markets, but provide enough juice to lift the markets to new highs. Just yesterday the Bank of Japan unexpectedly raised its bond buying program from JPY 70 trillion to 80 trillion and it also tripled its ETF buying to JPY 3 trillion. So as long as the federal reserves from around the world continue to increase their balance sheets, the bulls should have the upper hand.

The concern I have with the most recent market correction is that it didn’t last very long. It’s true that over the past five years most modest pullbacks immediately snapped back, just like this latest quasi-correction did. Personally, I would of liked the correction to last a little longer and go a little deeper for it feel like a meaningful correction. Because of the markets most recent snap back rally, all of the major averages are now fast approaching overbought conditions according the the Relative Strength Index (RSI). I truly think early next week will be the tell. If we continue to lift, then we will certainly breach the 70 value level of the RSI and enter into overbought territory and possibly remain overbought for the rest of the year. However, if the rally stalls, we could easily reverse and then who knows? Add the wildcard of mid-term elections this upcoming week into the mix, and most likely volatility comes back into the forefront. For me I am going to the sidelines until after the mid-term elections are over, and also to see if we stall here at record levels. Good luck to all and have a great weekend 🙂

~George

 

Chalk one up for the bears…

Posted on by George Mahfouz

The month of August proved to be the most challenging for the bulls in over a year. For the month, the Dow Jones Industrial Average (chart) closed down 4.45%, the tech-heavy Nasdaq (chart) -1.01%, the S&P 500 (chart) -3.13%, and the small-cap Russell 2000 (chart) finished the month lower by 3.29%. There are many factors that one can point the finger to as to why equities retraced last month, however, let’s keep in mind that on the year, these key indices are still up double digits with the Nasdaq (chart) and Russell 2000 (chart) leading the way up nearly 20%.

In my last blog, I questioned whether or not the weakness in August was a mere pause in this incessant bull run, or a preview of things to come? I think we will most certainly get this answer here in September and as early as this upcoming week. Between the crisis in Syria and what the ramifications could be after the possible airstrikes, to a slew of economic reports which culminates on Friday with the August employment report. Friday’s jobs report is expected to be the determining factor as to if and how much the Fed will begin to reduce its bond purchases. The Fed taper seemingly is all we have heard about since the beginning of summer and is part of the reason for the recent increase in volatility. Traders really don’t know what to expect once quantitative easing begins. For years the markets have had the back stop of the Federal Reserve and from central banks around the world. Personally, I think that once the Fed begins to pullback its bond purchases, we will then begin to see a more realistic market environment. This would be an environment that investors and traders can finally gauge their actions from true economic and corporate earnings performances, rather than what the Fed will or will not do. With that said, I expect volatility to continue to increase with a more normal ebb and flow of asset prices.

Technically speaking, the Dow Jones Industrial Average (chart), the S&P 500 (chart) and the Russell 2000 (chart) are all now trading below their 50-day moving averages  which is something I am paying close attention to now. In the coming days if the Nasdaq (chart)  joins in and begins trading below its 50-day, we could be in for very choppy trading and another leg down in September. Good luck to all.

Happy Labor Day 🙂

~George

Despite a modest pullback in June, the major averages continue to post double digit gains on the year…

Posted on by George Mahfouz

In month of June, the key indices witnessed a spike in volatility and their first monthly drop in 2013, however, stocks in the second quarter once again posted impressive gains. In Q2, the Dow Jones Industrial Average (chart) finished up 2.27%, the Nasdaq (chart) +4.15%, the S&P 500 (chart) +2.36% and the small-cap Russell 2000 (chart) closed the quarter up 2.73%. So far this year these averages are up an eye-popping 13.78%, 12.71%, 12.63% and 15.09% respectively.

As I look back over the past month or so volatility kicked into high gear as the Fed continued to signal that its bond purchases would relent as early as the fourth quarter of this year. Couple that with Japan’s Nikkei index dramatically declining over 20% in less than a month from its recent high, and the gold market (chart) getting taken out to the woodshed with gold having its worst quarter on record, losing over 24% on the quarter. It’s no wonder the key indices retraced in June. In fact, I am surprised that our averages did not decline any further considering all of the facts.

So what now you may ask? How does the second half of the year portend to be? Here is the catch-22. As economic numbers continue to improve, this will give the Fed more reason to begin to lighten up on their bond purchases, hence more market volatility. However, if the economy continue to grow anemically, this will give the Fed the green light to keep stimulating. What’s wrong with this picture though? In my opinion, at some point in time our economy will have to stand on its own two feet and the top line of corporate America will have to show meaningful growth in order for this bull market to continue. We won’t have to wait very long to understand the health and growth prospects of corporate America as Q2 earnings reporting season kicks into gear here in July. That said, as a trader you relish in the opportunities that earnings season provides both on the long and short side. However, make sure to abide by your trading plans, disciplines and always consider using protective stops as part of your plan. Earnings reporting season typically adds to volatility and larger than expected price movements. I bid you good luck.

All the best 🙂

~George

En route to 20%? Wait a minute…

Posted on by George Mahfouz

As stocks and key indices continue to break records, the four major averages are now approaching 20% gains year to date. So far this year, the Dow Jones Industrial Average (chart) is up a whopping 15.37%, the Nasdaq (chart) +13.81%, the S&P 500 (chart) +14.55% and the small-cap Russell 2000 (chart) is up year-to-date 14.81%. But hold the phone! A report issued after the close on Friday just might be what the bears have been looking for and what could be a catalyst to a pause or pullback to these red hot markets.

On Friday after the close, an article came out in the Wall Street Journal citing that the Federal Reserve has begun to map out a strategy for winding down its $85 billion-a-month bond buying program. This super aggressive part of the ongoing stimulus program has played an enormous role in the lift in equities and the economy over the past year or so. Although the article cited a variety of options that the Fed is outlining, there are some Fed officials calling for the wind-down to begin as early as this summer. I will be very interested to see how the markets react to the report this upcoming trading week. I do not think anyone expects that the Fed will be overly aggressive with any adjustment it makes, but nonetheless, stocks have been a huge beneficiary of this extraordinary component of the stimulus program. I wouldn’t be surprised if the markets will take this latest cue and begin to exhibit an increase in volatiltiy. Besides, and as everybody knows, equities have been long overdue for a pause at the very least, and even more so a healthy pullback.

As I look to the internals of the market, this unprecedented run stocks have had so far this year has been on lighter volume, but this also has been the case since the bull market began back in 2009. Whatever the case is, without question these markets have been and are over extended to say the least. Let’s see if the Fed’s latest statement shakes the trees out a bit. I am considering initiating a short bias theme in certain indexes but will have the utmost discipline in protecting any positions by have very tight stops. Seemingly, almost everyone who has attempted a short strategy this year most likely endured a great amount of grief, however, at some point and time the bears should have their day in the sun. I am not suggesting that anyone should short this market or any market for that matter, short selling markets of any kind involves a significant degree of risk and is not for the feint of heart. That said, and as always, make sure to consult with a certified financial advisor of your choice when considering any investment strategy. Have a great week 🙂

~George