fund managers

Dow 16000+, Nasdaq 4000+, S&P 500 1800+, Russell 2000 1100+! Records Continue to Shatter!!

Posted on by George Mahfouz

As we are now in the final month of the trading year, some of the top key indices  continue to set records. For the month on November, the Dow Jones Industrial Average (chart) finished up 3.48% closing at 16086.41, the tech-heavy Nasdaq (chart)  was up 3.57% closing the month at a 13 year high of 4059.88, the S&P 500 (chart) advanced 2.8% in November closing at a record high of 1805.18 and the small-cap Russell 2000 (chart) closed the month of November up 3.88% at 1142.89, yet another record. I think one of the reasons why the markets continue to lift into year-end is that most pundits do not believe that they can. There is not a day that goes by where “bubble” is not one of the top headlines in print, online or on the tube. That said, in my last blog I highlighted the current technicals of the top key indexes and in particular the Relative Strength Index (RSI) technical indicator. Well in the last two weeks or so both the Dow (chart) and the Nasdaq (chart) have now breached the 70 value level with the S&P 500 (chart) and the Russell 2000 (chart) not too far behind. The 70 value level according to one of the RSI principles is an overbought condition. If you go back historically and analyze what typically happens when an index or equity for that matter enters into an overbought condition, the majority of the time a “reversion to the mean“ occurs. Now this is not to say that overbought conditions in an index or stock instantly changes course, however, typically at some point in time a reversion does indeed occur. Now with that said, I have seen indexes and stocks remain overbought for weeks and months at a time before a natural reversion occurs, but it’s something to keep an eye on especially if you have long term gains in your portfolio or if you are a trader and have the gumption to consider a short strategy in this parabolic market.

As this broad rally continues and as we are now in overbought conditions in certain key indexes, one has to wonder what will it take for a “reversion to the mean?” to occur? At this point in time in the calendar year, I am not sure? With only one month left to go in 2013 and with third quarter earnings reporting season behind us, a Federal Reserve that continues to be extremely dovish and fund managers year-end window dressing upon us, whatever pullback (if any) that may occur between now and year-end should be met with anxious support. I just do not see any type of a imminent catalyst that would jar these markets significantly, unless some unforeseen macro/geopolitical event happens, which of course is always a possibility. Should an unexpected negative geopolitical event occur, this in my opinion would be one of the only conditions between now and year end that could create a “reversion to the mean” type scenario that most bears have been waiting on.

Good luck to all 🙂

~George

A bull stampede!

Posted on by George Mahfouz

Stocks are on a rampage with the Dow Jones Industrial Average (chart) surpassing and closing above the 14,000 mark for the first time in over five years. For the week, the Dow Jones Industrial Average (chart) finished up 0.89% the Nasdaq (chart) +0.93%, the S&P 500 (chart) +0.68% and the small-cap the Russell 2000 (chart) closed the week up 0.66%. For the month of January both the Dow Jones Industrial Average and the S&P 500 had its best showing in decades.

So why so much bullishness? Well for starters, before the market opened today the non-farm payroll number came out and 157,000 new jobs were added to the economy. Good, right? Not so fast. The unemployment rate actually ticked up to 7.9% in January and furthermore, the economy needs to add at least 250,000 new jobs per month in order to make a meaningful dent in the unemployment rate . So you ask, “how can this be good for stocks?” Here is the oxymoron. As long as the economic numbers remain tepid, the federal reserve will continue its stimulus program(s) which in turn bodes very well for stocks. A zero to a quarter percent interest rate environment forces money off of the sidelines that is seeking a respectable yield. This especially rings true for fund managers and institutional money managers who really must produce higher than average returns to appease their investors.

For me personally this type of market environment is very difficult to navigate. On one hand you have the fed ready to expand their balance sheet which in turn fuels stocks, and on the other hand you have a weak economy which should translate to lower equity prices. Instead, this market is making multi-year highs across the board. Without question stocks are way overbought and are due for a healthy pullback. If you dare to short this market in attempt to call a short term top, make sure you have explicit protective stops in place. The same discipline should also be honored if you open any new long positions. Going forward, I am expecting some type of pullback which would probably be met with noticeable support at least in the short term. Good luck to all.

Have a great weekend 🙂

~George

 

A positive week for stocks, next up Q3 earnings…

Posted on by George Mahfouz

The market posted its first weekly gain in almost a month, this right before earnings reporting season begins. For the week the Dow Jones Industrial Average (chart) finished up 1.29%, the Nasdaq (chart) +0.64%, the S&P 500 (chart) +1.41%, and the small-cap Russell 2000 (chart) closed the week up 0.65%.

Third quarter earnings reporting season will be the highlight next week with earnings reports coming out of Alcoa (NYSE: AA) Yum Brands (NYSE: YUM) and JPMorgan Chase & Co (NYSE: JPM), just to name a few. Most analysts have ratcheted down their earnings forecasts due to the tepid pace of global growth and the number of companies that have pre-announced to the downside. The big question now is, are these adjustments already priced into equities and indexes? My feelings are that if there are any big surprises to the downside and stocks sell-off, that fund managers and institutional buyers are sitting on the sidelines ready to act. We cannot forget the position of the Fed which essentially gives this class of investors the green light to deploy capital into the markets. Of course there are no guarantees that this will be the mandate, however, odds are that any significant sell-off due to earnings reporting season would be met with support. Good luck to all.

Have a great weekend 🙂

~George