investment

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

 

Stocks Go On A Bumpy Ride…

Posted on by George Mahfouz

The stock market ended the week eking out slight gains. For the week, the Dow Jones Industrial Average (chart) closed higher by 0.6%, the Nasdaq (chart) barely closed in the green on the week, the S&P 500 (chart) closed up 0.7% and the small-cap Russell 2000 (chart) finished the week up one half of one percent. I guess this could be viewed as a big win for the key indices considering how light crude oil (chart) has plummeted recently which directly correlates to the energy industry as a whole. Energy stocks have also gotten crushed along with oil which is why I think it’s rather impressive that aforementioned indexes were able to end the week in positive territory. However, volatility (chart) is continuing to spike and the 200-day moving average on the S&P 500 (chart) continues to get challenged. Some pundits believe that it’s only a matter of time that the 200-day on the S&P (chart) will not hold much longer, however, if you look back, no one can deny how this technical metric has been a pillar of support for this most watched index.

So what does an investor or trader do in this historically weak month for stocks and with volatility spiking now weekly? For me personally, I am not as active in the markets due the volatility spikes and typically lower volumes associated with the summer month of August. I prefer to spend my time in research identifying opportunities in the marketplace. For instance, watching the oil markets unravel the way that they have, without question opportunities are forthcoming in this space. The majority of individual energy stocks do indeed trade with the price of oil (chart) and to predict when the price of oil will stabilize is almost impossible. However, at some point in time oil will indeed stabilize and a plethora of opportunity will surface. If you do not want to take the risk on individual names, you can always consider the most popular ETF that tracks the energy space (symbol: XLE). This equity energy fund has an approximate $11.69 billion in net assets with holdings in some of the largest and most respected energy companies in the world. Of course and as I always recommend, it is always best practice to consult with a certified financial planner(s) that you feel comfortable and confident with before making any investment decisions. Good luck to all 🙂

~George

Bank Stocks Finally Catch A Bid!

Posted on by George Mahfouz

As earnings reporting season kicks into high gear one of the sectors that are surprising investors to the upside are the banks. Citigroup (NYSE: C) started things off yesterday reporting an adjusted earnings per share of $1.24 compared to the $1.05 most analyst’s were anticipating. This earnings beat has lifted Citigroup’s stock over 3% the past two days. This morning Goldman Sachs Group (NYSE: GS) also announced an unexpected profit of $2.04 billion dollars or $4.10 per share while analysts were expecting earnings of $3.05 a share. This beat sent Goldman’s shares up 2% this morning although there could be a short term technical hurdle in the $171.oo range (chart) that GS may face. Back in mid-June, Goldman had a high of $171.08 before losing 5.5%. Goldman’s shares have since rebounded back to the $170 zone. Should GS be able to break through the $170 zone, it could very well test its 52 week high of $181.13. If it cannot break through this short term resistance zone in a meaningful way, then a possible re-test of the mid-June lows could occur (chart). Also reporting this morning before the market opened was JP Morgan Chase (NYSE: JPM). JP Morgan reported an earnings beat of $1.46 compared to $1.29 per share most analysts were expecting. This unexpected earnings beat sent shares of JP Morgan Chase (chart) up more than 2% in early morning trading. Whether or not this is a short term bounce or the beginning of a new trend for the banking sector has yet to be seen. I would suspect that the banking pundits will want to see a widening of yield spreads before they get too bullish.

After the bell, the focus will turn to the tech sector. Both Intel (NasdaqGS: INTC) and Yahoo (NasdaqGS: YHOO) will report their quarterly results. Intel has been on a tear gaining over 20% since mid-May (chart). In my humble opinion, Intel is really going to have to crush their numbers and up forward guidance in order for their stock to keep rising here in the short term. Yahoo on the other hand seems to be trading on what Alibaba’s valuation will come out as when they go public in the near future. Two other bellwether tech stocks Ebay (NasdaqGS: EBAY) and Google (NasdaqGS: GOOGL) will report their quarterly results tomorrow and Thursday respectively. So as you can see there are trading opportunities abound, however, my preference is to wait to see how companies report before making any trading or investment decisions. I do think this earnings reporting season will dictate how the overall markets will fare in the second half of this year. So far so good in this reporting season, but there are hundreds of companies yet to report so let’s not draw any significant conclusions. Also, please remember it is good practice to consult with a certified and trusted financial advisor(s) before making any adjustments to your current portfolio or making any investment decisions for that matter.

Good luck to all 🙂

~George

Happy New Year!

Posted on by George Mahfouz

If 2014 comes anywhere near the performance the overall markets experienced last year, once again the bulls will be popping champagne. For the year 2013, the Dow Jones Industrial Average (chart) closed up a breathtaking 26.5%, the Nasdaq (chart) finished the year up a staggering 38%, the S&P 500 (chart) booked a spectacular gain of almost 30% and the small-cap Russell 2000 (chart) soared 37%. I think it’s safe to say that an exact repeat of 2013’s performance is highly unlikely, but there is seemingly no reason to believe that this momentum won’t continue into the new year. Even the key indices in Europe had very impressive double digit gains in 2013 with the German DAX index leading the way surging 26% on the year.

With that said, the first thing that pops out to me is that the aforementioned key indices are all now near or completely in overbought territory according to the Relative Strength Index (RSI) technical indicator. We have been monitoring these indexes since October of 2013 to see when they may go into extreme overbought conditions and with the powerful year end close, we now have 3 of the 4 key indexes officially in overbought territory with the Russell 2000 (chart) only a few value points to go. So what does this all mean for the investor or even more so, to the trader? By now all of you know that I personally view the RSI as a reliable technical indicator distinguishing whether an index or stock for that matter is overbought or oversold. In fact, certain computer algorithmic trading models are designed to act whenever extreme conditions occur in a given market or stock. Let’s recap the definition of the Relative Strength Index or the RSI. In the most simplest terms, the RSI is designed to demonstrate whether or not an index or equity is overbought or oversold, depending on certain value levels. According to the RSI principle, the 70 value level or greater, is an overbought condition and the 30 value and below is an oversold condition. And as mentioned the majority of the key indices along with dozens of stocks are now in overbought territory. This doesn’t mean that we will all of a sudden see a dramatic turn in the opposite direction, however, typically when stocks or indexes are in overbought or oversold conditions such as they are now, at some point in time, a change of direction ensues.

The wild card that will most certainly continue to play out is of course the Federal Reserve and what course of action they will take and uphold in 2014. Especially now that the Fed has started to reduce its asset purchases. We all know that the accommodative policies of the Fed over the past few years has placed a floor under these markets and whenever any attempt of a pullback or mini-correction has occurred, that condition has been met with unprecedented support, hence new market highs followed. I would expect as long as the Fed continues to support the bond and mortgage backed securities markets, even at a reduced rate, whatever pullbacks or retracements that do occur, buyers will be anxiously awaiting to add to their positions or open new ones.

I do expect a healthy 5%, 10% or even 15% correction in 2014 and if you have the gumption to go short, this could serve you well. Of course no one knows if or when this correction may take place, however, as highlighted, we are now in overbought territory which could be one of the catalysts to prompt a pullback or even a subtle correction. Should we get this healthy correction, we will be looking into the financial and technology sectors to identify opportunities to capitalize on. Please note this is not a recommendation to go short or long any asset or index, and it is prudent to consult with a certified financial planner(s) before making any investment decisions.

Good luck to all and both Paula and I wish everyone a very safe, prosperous and Happy New Year 🙂

~George

Stocks and Indexes Continue to Set Records!

Posted on by George Mahfouz

The month of October proved to be yet another record setter with a number of stocks from a variety of sectors hitting all time highs and the S&P 500 (chart) setting a new record high of 1775.22 on Wednesday. The Dow Jones Industrial Average (chart), the Nasdaq (chart) and the small-cap Russell 2000 (chart) all hit 52 week highs as well on Wednesday. This seemingly unstoppable bull run is unprecedented with gains of over 20% on most of the key indices year to date. I think it is fair to say a pause is overdue and would most likely be very healthy for the overall market.

In last month’s opening blog, I discussed how selling options premium can be beneficial in times of increased volatility, and in particular the “covered call” strategy. Today I would like to cover “selling puts” as a way to create options premium income. Unlike the “covered call” strategy where you must own the underlying security in order to “write or sell” a covered call, selling a put does not require you to own the security. However, by selling a put, you are potentially obligated to purchase the security should it close below the strike price you chose on its expiration day.

Let’s look at an example of selling a put on a given stock and like last month I will use Facebook (NasdaqGS: FB) as the example. Facebook is currently trading around $50 dollars a share. In looking at the options chain on Facebook and its current pricing, the December $48 puts are bidding around $2.00 dollars per contract. If an investor were to sell 10 December $48 dollar puts on Facebook for $2.00 per contract, that investor would bring in $2,000 dollars in premium less transactions costs. If Facebook closes above $48.00 dollars a share on expiration Friday in December, the investor would keep the entire premium he collected. However, by selling the 10 put option contracts, the investor has the obligation to purchase 1000 shares of Facebook should Facebook close below $48.00 per share on expiration Friday in December. It’s important to note that before considering and implementing a “selling put” strategy you must be willing to own the stock at the strike price you sold the puts on and in this Facebook example, that would be $48.00. However, your cost basis would not be $48.00 because you received $2.00 in premium when you sold the puts, therefore, your cost basis would be $46.00 per share less transactions costs.

Please also note this is not a recommendation to sell puts on Facebook or any other asset or index. This is merely another example of how an investor can capitalize on selling options premium. In closing and as I always suggest, please consult with a certified financial planner(s) before making any investment decisions.

Have a great weekend 🙂

~George