correction

Finally The Bulls And Bears Got What They Wanted!

Posted on by George Mahfouz

A Correction! After years of not having a 10% or more correction in the markets and with August tending to be one of the worst performing months for equities, this was the perfect set-up for the long overdue correction in stocks to take place. However, just as fast as the stock market correction occurred, the ensuing snap back rally was equally eye-poping. For the month, the Dow Jones Industrial Average (chart) fell 6.57%, the tech focused Nasdaq (chart) lost 6.86%, the S&P 500 (chart) -6.26% and in the month of August the small-cap Russell 2000 (chart) experienced a 6.45% decline. Last week we did witness very rare market behavior with whipsaw action not seen since the 2008 financial market crisis. This brought back memories of how stocks and financial markets can irrationally behave as emotions and high frequency trading take over.

The question now is, is this type of market volatility over? I don’t think so. Let’s first take a gander of the technical health of the four major averages. Without question, short term technical damage in these key indices have occurred. Each one of the index have fallen sharply and have closed below their respective 200-day moving averages. Furthermore, today at the open and for the first time in years, the S&P 500 (chart) will have its 50-day moving average crossover its 200-day moving average. Technically and historically speaking, this is not usually a good thing. The Dow Jones Industrial Average (chart) saw its 50-day crossover its 200-day in the middle of August only to experience exhaustive selling thereafter. The good news technically is that stocks had been way oversold to the point 0f capitulation. Hence, the ensuing sharp rally from the most recent lows.

So where do we go from here? I suspect that we will continue to experience outsized market moves in both directions and trading this kind of market environment is not for the feint of heart. I revert back to a more conservative approach starting with identifying the most current “best of breed” in their respective industries. The first prerequisite for me in identifying potential investment candidates in this type of market environment is for companies to have pristine balance sheets with little to no debt levels. However, if they do have debt they must have have historic and current cash flows that can easily service their debt. Without this and in today’s market I have no interest on really owning anything. Of course there are many other metrics that do apply but for me personally the balance sheet is where it begins. Another huge factor for me especially today is to implement disciplined  “protective stops” in any positions I hold. This ensures that your portfolio is somewhat protected should the markets decide that we are in the early innings of this correction. With that said and especially in today’s market, please consider consulting with a trusted certified financial planner(s) before making any additions or modifications to your own portfolio.

Both Paula and I wish everyone a very safe and Happy Labor Day holiday weekend 🙂

~George

 

Is That It?

Posted on by George Mahfouz

After what appeared to be the beginning of a healthy correction in the early part of August, stocks held true to form and rallied back this week even as Ukrainian forces engaged and attacked a Russian armored convoy today. When news leaked about the attack, the markets did reverse their earlier gains and dropped meaningfully only to find support and rebound off sessions lows. The Nasdaq (chart) actually finished the day in the green. If you are long this market and are bullish for the remainder of the year, you have got to feel pretty good about how the markets have responded this week to a very unstable geopolitical global environment. For the week, the Dow Jones Industrial Average (chart) gained 0.66%, the Nasdaq (chart) finished the week up 2.15%, the S&P 500 (chart) +1.215% and the small-cap Russell 2000 (chart) closed the week up 0.91%.

Does this mean we are out of the woods yet? I am not so sure. One thing that I believe will continue is market volatility. There is headline risk and equities are certainly reacting to sudden headlines that come out of Ukraine as well as the middle east. The surprise I think is how resilient the U.S. stock market remains in the midst of the geopolitical risks that are upon us. However, this is the one thing that continues to concern me is the escalation of conflict in not just one region but now in two. One way to insure a portfolio is to buy some protection in the form of S&P 500 puts, and more specifically puts on one the most popular ETF that tracks the S&P 500, the SPDR S&P 500 (NYSE: SPY) (chart). So if you have a long portfolio in equities, by buying put protection with the SPY’s, it is like buying an insurance policy should the equity market experience a correction. Put options go up in value should the equity or index you buy puts in goes down in value. Options are not for everyone and it is usually wise to consult with a certified financial planner(s) before implementing any investment strategy, I am just illustrating one way to protect a long portfolio by way of insuring it to a certain degree.

As far as I am concerned, I will continue to monitor the technical conditions of the aforementioned indexes and look for any signs of overbought or oversold conditions to act upon. As of right now the key indices are not in either condition. Good luck to all 🙂

Have a great weekend.

~George

Correction Chatter Abound…

Posted on by George Mahfouz

Here come the pundits! Over the past couple of weeks the conversations of a significant market correction have spiked along with market volatility.  From billionaire investor David Tepper’s comment that “the markets appear to be dangerous” at last week’s annual SALT conference to Dennis Gartman of the renowned “Gartman Letter” stating we are in a correction as we speak. There is certainly no shortage of opinions flooding the airwaves. Now granted, recently stocks have been in somewhat of a downward trajectory especially the so called “momo” (which stands for momentum) stocks and the more riskier small-cap asset class. In fact, the small-cap Russell 2000 (chart) has been sold off more so than any other index losing around 10% from its high in early March. This while the Dow Jones Industrial Average (chart)  recently made an all time high at 16,735.51. I think it’s safe to say there has been a rotation going on, a rotation out of riskier assets into the bellwether blue chip stocks.

So what about this apparent correction that is about to happen? Some pundits are calling for as much as a 20% correction at any time. I am not so sure about that. Seemingly, when the markets do become vulnerable and volatile regardless of why, the bears begin to come out of hibernation. Yes, this bull market does appear to be a bit long in the tooth, but in my opinion one factor that still stands in the way of a severe market correction, you guessed it, the Federal Reserve. Even though the Fed has begun to taper its bond and asset purchases, they have also indicated that should the “facts on the ground shift” hence, our economy heads into a recession or should the markets experience a severe sell-off, that it would be prepared to make adjustments to its policies, in other words, another form(s) or an extended version of stimulus would most likely occur. So how can anyone bet against these markets when you continue to have the Federal Reserve as the floor to any potential significant selloff? This does not mean that volatility will not increase or that we couldn’t see pullbacks or even quasi-corrections and should this be the case, I have got to believe the bulls would step right in and deploy their capital right along with the Fed.

So if you are currently bearish on equities or you are buying into the chatter of an imminent market correction and have gone short, you may want to consider covering your positions in the event of a 5 or 10% retracement or for that matter, a breakout from the current levels. Personally, I will look to add to certain positions should we see the correction many are talking about. Of course, it is always best practice to consult a professional financial advisor(s) before developing a market strategy or making changes to your portfolio. Good luck to all.

Memorial Day weekend is coming up and the markets will be closed on Monday May 26th. Both Paula and I wish everyone a safe and healthy Memorial Day and we want to thank and are grateful to all of the veterans and their families who gave the ultimate sacrifice serving our beloved country. We also want to thank the brave men and women who are currently serving our country and protecting our freedoms.

Sincerely,

~George & Paula