historically

No Surprise Here…

Posted on by George Mahfouz

It’s no surprise here that the month of August was weak for the overall stock market. Despite the current economic backdrop historically August tends to underperform compared to the rest of the year. The Dow Jones Industrial Average (see chart here) last month closed down over 1000 points and the S&P 500 (see chart here) closed below the 4000 mark. The Nasdaq Composite (see chart here) gave up over 500 points and the small-cap Russell 2000 (see chart here) pulled back slightly. That being said and considering the current headwinds we are facing I believe stocks held up pretty well.

Now that we are in September and from a seasonal perspective especially with mid-terms approaching, I anticipate volatility to continue. There is also a possibility that vol will accelerate. Looking at the current backdrop, we have a Federal Reserve that continues to raise interest rates, corporate earnings are stagnating and the political situation in our country is nothing to be proud of now. Taking all of these factors into consideration, plus the constant flow of negative news, August could off sold off a lot more. Out of all these dynamics I prefer to tune out most all of the noise and really study how the Federal Reserve is navigating itself through this cycle. To me it is this entity that swings the biggest bat on how the markets move. As you know by now, I also pay attention to the technical shape of the key indexes.

Speaking of the technical shape of the market, let’s take a look. The Dow Jones Industrial Average (see chart here) is trading below its 20 day, 100 and 200 day moving averages. The S&P 500 (see chart here) is also experiencing a technically weak pattern as is the Nasdaq Composite (see chart here) and the Russell 2000 (see chart here). Again, no surprise here but I did notice the markets today appeared to find some support. For the markets the dog days of summer are almost over, but I think we all need to buckle up between now and the mid-terms because I do expect volatility to continue.

Good luck to all and have a great and safe Labor Day Holiday!

~George

The Bears Are Baffled!

Posted on by George Mahfouz

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