interest rates

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

What A Month For Stocks!

Posted on by George Mahfouz

What a month for stocks as the major averages rebounded sharply in July. After witnessing an incessant selloff over the past few months, July turned out to be the best month for stocks in years. After falling into bear market territory, the S&P 500 (see chart here) gained almost 10% last month cutting its year to date losses in dramatic fashion. As I look at the Dow Jones Industrial Average (see chart here) a thousand-point gain in the last week or so is not too shabby either. Last but not least, both the Nasdaq Composite (see chart here) and the small-cap Russell 2000 (see chart here) also has enjoyed a strong recovery from their recent lows.

So why was there such a strong performance in the month of July? Q2 earnings reporting season is in full swing and at best this Q2 earnings so far have been a mixed bag. The Fed last week also raised interest rates another 0.75%. Inflation remains at or near 40-year highs. So, if you solely look at these metrics one would think the recent selloff would be accelerating. Clearly this is not the case, yet! The bears would argue that this is an “oversold” bounce and part of me agrees with that. However, I think it is too early to say that we are back to a full-fledged bull market. I do think if the markets remain stable over the next couple of months this could be a sign of a bottoming process. Let’s see how the rest of the summer plays out.

Now let’s move over to the technical shape of the aforementioned indexes. What has caught my eye is how the major averages are either at or have recaptured their 100-day moving average. This important support and/or resistance line is key as to whether stocks will pause into the resistance that moving averages experience, or if the momentum continues, then this could mean that this latest bull run will continue.

Good luck to all 🙂

~George

The New Norm…

Posted on by George Mahfouz

I think it is becoming safe to say that we are now in the new norm! The stock market for over a decade has feasted on the Federal Reserve’s accommodative policies and most recently the stimulus provided by governments from around the world during the pandemic. Under normal market conditions, stocks trade on their own merits and prospects. This has simply not been the case in years. Fast forward to today and we now have a Federal Reserve raising interest rates, reducing their own stimulus programs to stave off inflation and get back to more normalized Fed policies and procedures. Now the markets are taking notice. Volatility in the markets continue as has been the case for months now. Year to date, the Dow Jones Industrial Average (see chart here) is down 10 percent, the S&P 500 (see chart here) is lower by 15%, the Nasdaq Composite (see chart here) on the year is down almost 25% and the small-cap Russell 2000 (see chart here) is down about 18%.

Yes, I believe we have entered a new norm. Which isn’t necessarily a bad thing from the standpoint of properly evaluating companies. What’s been very difficult during the past decade or so is how to evaluate public companies. The Federal Reserve and its unprecedented accommodative monetary policies was a huge driver of how companies were valued. Meaning this, when there are hardly any choices of attaining yield whether it is from stocks or bonds, this forces capital into the stock market or other higher risk assets. This has been one of the primary drivers of the incessant bull market investors have enjoyed over the years. Now, companies are going to have to perform to maintain their position in the marketplace. The ones that do, will be rewarded, the ones that don’t will experience adjustments in their valuations.

With all the above being said, I am confident that once the stock market bottoms out, there will be great opportunities to consider and act on. Good luck to all 🙂

~George

Technically Speaking…

Posted on by George Mahfouz

The sell-off in the markets accelerated in the month of April and technically speaking it appears there could be more selling pressure ahead. On the year, the Dow Jones Industrial Average (see chart here) is down nearly 10 percent, the S&P 500 (see chart here) is off over 13%, the Nasdaq Composite (see chart here) is down over 21% and the small-cap Russell 2000 (see chart here ) year to date is down 17%.

I am not surprised of the market weakness due to all the factors at play right now. From the war in Ukraine, to the highest inflation rates we have seen in over 40 years, the ongoing Covid backdrop albeit this dynamic appears to be improving and finally, interest rates. The Federal Reserve now has woken up to the fact that this low interest rate environment that we have lived in for over a decade is over. Runaway inflation has now become a major concern for the Fed, and they are now being beyond vocal of their intentions. A 50-basis point increase appears to be the hike here in May and hikes throughout the year are in play. In my view, this is the top catalyst as to the sell-off but let’s keep things in perspective. Last year and previous years for that matter have been a boon for stocks and pretty much every other asset class out there. Record after record have been set for years on asset classes and this is simply not sustainable. A healthy correction is beyond needed and it seems like we are in that mode now!

Now let’s look at the technical shape of the aforementioned key indexes. The Dow Jones Industrial Average (see chart here), the S&P 500 (see chart here), the Nasdaq Composite (see chart here) and the Russell 2000 (see chart here) all closed the month of April out below their key moving averages. The 20-day, 50-day, 100 and 200-day have all been breached while the Relative Strength Index aka the RSI have not yet breached an “oversold” condition. The RSI is a technical “momentum indicator” that has two values of importance. The 70-value level for potential “overbought” conditions and the 30-value level and below is a level that is considered “oversold. All the above indexes are currently hovering around the 35 level. Please remember “technical indicators” are there as a guide and a tool when assessing the technical backdrop of any given stock or index and is not 100 percent perfect.

Good luck to all 🙂

~George

 

 

 

The 200-Day Recaptured!

Posted on by George Mahfouz

On the last trading day of January, both the Dow Jones Industrial Average (see chart here) and the S&P 500 (see chart here) recaptured and closed above their 200-day moving averages. Why is this important to note? The 200-day moving average of any index or stock for historically acts as significant support in an uptrend and in a downtrend can act resistance. Since the first half of the new year both of these indexes have sold off to the extent of breaching their 200-day moving averages. This can also be said for the Nasdaq Composite (see chart here) and the small-cap Russell 2000 (see chart here). What’s different right now amongst these key indexes is that the Nasdaq and Russell (see chart below) remain below their respective 200-day with some work to do. Let’s see if these two bellwethers can catch up to the Dow and S&P 500.

Headwinds do remain in the economy including inflation and now the backdrop of an upcoming rising interest rate environment. I think if the Federal Reserve manages their interest rate hikes in a methodical manner and communicates effectively to the street of their intentions, I don’t think the markets will be disrupted too much. Of course, geopolitical events such as the potential of Russia invading Ukraine and North Korea engaging once again in missile tests, these dynamics depending how they play out could impact the markets in the near term and the downtrend we witnessed last month could resume. Hopefully both geopolitical events turn out to be no more than a threat vs a reality.

Notwithstanding the above, I do see some hope with the pandemic numbers as of late. It does appear the spike in infections due to the omicron variant seem to have peaked which is great news for our country and the world for that matter. Hopefully soon there could be some semblance of normality which could be the catalyst for the recent downtrend in the markets to reverse its course as well.

Good luck to all 🙂

~George

The 200-Day Recaptured! - Paula Mahfouz

 

 

 

 

53 Record Highs And Counting…

Posted on by George Mahfouz

The S&P 500 (see chart here) has hit 53 record highs so far in 2021 and counting. That’s right folks 53 all-time highs this year alone. The Nasdaq Composite (see chart here) has logged 32 record highs in 2021 as well. The Dow Jones Industrial Average (see chart here) has also been on fire trading above the 35000 level and the small-cap Russell 2000 (see chart below) continues to perform alongside the aforementioned bellwether indexes. How much longer can this bull run? I think it began with the Federal Reserve and its longstanding monetary policies and now there seems to be a subtle change in the Fed’s position.

Last Friday at the Federal Reserve’s Jackson Hole Economic Symposium, Fed Reserve chairman Jerome Powell signaled again that the Fed would soon begin to pullback on its $120B per month bond asset purchases. This support to the markets and the economy along with a zero percent interest rate backdrop has been THE catalyst to support record high after record high in our stock market. Of course the massive economic stimulus packages that have been disseminated since the start of the pandemic has also played a role in consumer spending which has also propelled stocks to new heights.

Now we all know this cannot go on forever. Free money, zero percent interest rates, asset purchases and the like will end at some point in time. The question then becomes what happens to the stock market when all of this support winds down? Friends the answer is simple. Corporate America is going to have to produce on its own. Meaning this, for the continuation of this decade long bull market, companies will have to not only have to catch up with their current valuations they will have to exceed expectations going forward. This will certainly separate real growth companies from the rest of the pack and that’s when we just may see a more normal ebb and flow in our markets. Good luck to all 🙂 and have a safe and Happy Labor Day weekend.

~George

53 In a Row And Counting - Paula Mahfouz

 

 

 

Record Highs Again!

Posted on by George Mahfouz

Record highs were hit again this week as both the Dow Jones Industrial Average (see chart here) and the S&P 500 (see chart here) continue to plow ahead. However, not the same can be said for the Nasdaq Composite (see chart here) and the small-cap Russell 2000 (see chart here). Both of these indexes have lagged behind the Dow and S&P torrid pace.

As with technology and small-cap stocks, when interest rates begin to move up these sectors begin to take notice. The 10-year treasury yield is one of the go to benchmarks that professional money managers key in on. This week the 10-year yield touched a one year high of 1.77% (see chart here). It’s easy to look at that yield and think that this yield is not that high at all. However, when you realize that just last summer the yield on these bills were at 1/2 of 1 percent, the move up to 1.77% does stand out. This sharp move from off the lows of 2020 is what has caught the eye of professional money managers that value high growth companies. It is clear that a full rotation out of high multiple stocks has not occurred yet, but higher interest rates and the threat of the continuation of higher interest rates seem to be the reason why the Nasdaq Composite (see chart below) and the small-cap Russell 2000 (see chart here) have lagged.

Now that the first quarter of 2021 has ended, Q1 earnings reporting season is on the horizon. I am not sure what to expect out of corporate America pertaining to top or bottom line growth. We find ourselves at what appears to be the start of coming out of the pandemic with some degree of normalcy. I would not be surprised if corporate America is bullish on their quarterly conference calls and speak directly to the early results of the vaccine deployment and the change that they are seeing in their customers behavior and spirits.

Good luck to all -)

~George

Record Highs Again! - Paula Mahfouz

 

 

 

 

 

Does It Feel A Bit Bubbly?

Posted on by George Mahfouz

Do the markets feel a bit bubbly to you? This question is beginning to surface more frequently lately and I think it’s a great question to be asking. The majority of asset classes seemingly have gone straight up without pause over the past several months. Whether it’s the stock market as a whole, the crypto space or one of the hottest trends lately are SPAC’s. What is a SPAC? A SPAC is a special purpose acquisition vehicle that is publicly traded but has no assets other than cash. These vehicles are specifically designed to form as a public company, raise capital and then seek out companies to acquire. For example the electric vehicle space has been one of the favorite sectors for SPAC’s to target over the past year. This is a much easier pathway for private companies to go public without having to go through the time and expense of a traditional IPO.

One of the problems that is happening with the SPAC trade is once they identify a target and move to acquire it, the valuations of these SPAC’s begin to rise steadily into the nosebleed section of the markets. So much speculation is occurring with these SPAC’s institutional and retail investors are willing to pay essentially any price to get on board. Let’s not forget about the day traders that add fuel to the rise in these SPAC’s. So between all of the above and now with interest rates starting to tick up, it’s now wonder we have witnessed over a 1000 point drop in the Dow Jones Industrial Average (see chart here) to close out last week. Now let’s look at the technical shape of the major averages.

The Dow Jones Industrial Average (see chart below), the S&P 500 (see chart here), the Nasdaq Composite (see chart here) and the small-cap Russell 2000 (see chart here) over the past few trading sessions have all dropped below their respective 20-day moving averages and are finding support at their 50-day. Let’s see if these key indices can hold their 50-day moving average support zone this week. If they can the uptrend could very well remain intact, if not, we could see late last weeks selling pressure continue.

Good luck to all 🙂

~George

Does It Feel Bubbly? - Paula Mahfouz

Stocks Have Gone Wild!

Posted on by George Mahfouz

Stocks have gone wild since the election with the Dow Jones Industrial Average (see chart here) breaking the 30000 level for the first time ever last week! This morning the S&P 500 (see chart here) hit its all time high trading above 3660. The Nasdaq Composite (see chart here) is also trading at its all time high and the small-cap Russell 2000 (see chart here) has also recently hit an all time high.

So why all of this love for stocks while we are in such a tumultuous time? I think it is safe to say that the Federal Reserve continues to play a major role in this never ending rally. Essentially zero percent interest rates, massive stimulus packages along with asset purchases remains the top catalysts for these record setting ways. The ironic part of disasters and catastrophes is the willingness and capabilities of central banks to step in to offset the negative economic impact of such catastrophes. COVID-19 has shocked the world and has lead to widespread unemployment, while devastating businesses and industries alike. Never before have we seen such widespread effects on life as we know it. The good news now is there is light at the end of the tunnel. The recent news on the advancements with vaccines and their effectiveness is very encouraging. Some pundits are now saying we could be at herd immunity by the summer of 2021. Let’s hope this is the case.

Now this is where things can get tricky for the markets. As the light at the end of the tunnel gets brighter, what happens when the Federal Reserve begins to change its stance on accommodative policies? The Fed backstop will not last forever. The risk here is that when the Federal Reserve signals a change in direction, it is then that the markets will become more tethered to actual corporate earnings power. So if you stay long this market or if you are adding on new positions, it would be a good idea to make sure you are invested in companies and sectors that have earnings power and continuing growth prospects.

Good luck to all 🙂

~George

The 200-Day Moving Average Holds!

Posted on by George Mahfouz

The 200-day moving average held its ground despite the constant tape bombs and tweets that continues to come out of Washington. It is no secret that stocks have been on a wild ride over the past few weeks from making all-time highs to rip roaring selloffs. The continuation of tariff threats out of Washington has been a huge catalyst for the increase in volatility in stocks. That said, with all of the madness that is swirling around the Dow Jones Industrial Average (see chart here), the S&P 500 (see chart here) and the Nasdaq Composite (see chart here) have all managed to stay above their respective 200-day moving averages. This key technical support line has held true to form during these market selloffs. The small-cap Russell 2000 (see chart here) has not been as fortunate and could not hold its 200-day.

So in addition to the Washington D.C. threats of additional tariffs, the markets also had to deal with the dreaded 10-year and 2-year yield curve inverting. Whenever longer term interest rates fall below shorter term interest rates in the bond market that historically is a signal that a recession might be looming. Now there is a meaningful lag here whenever we see the yield curve inverting, so as long as the curve flattens out and returns to a normalized dynamic, we should escape the threat. However, if the yield curve remains inverted for an extended period of time then we could be in for something else.

Let’s get back to the technical shape of the markets. As mentioned, three of the four major averages held above their respective 200-day moving average support line which is a good thing technically. What also helped is during these meaningful selloffs is that the markets did go into oversold territory and technically bounced. Let’s see how the next couple of weeks shape up as we wind down the dog days of summer.

Good luck to all 🙂

~George