A Breakout Or A Fake-out?

The major averages seemingly are on the verge of a breakout, or could it be a fake-out? The Dow Jones Industrial Average (see chart here) has recaptured the 25000 level. The S&P 500 (see chart here) has recaptured the 3000 level. The Nasdaq Composite (see chart here) believe it or not is in striking distance of its all-time high and the small-cap Russell 2000 (see chart below) is also setting up for a breakout on its own. It is beyond impressive how the markets have come roaring back since late February. There are certain pundits out there that believe that this is a classic bear market rally however to me it feels like more than that. I have to believe that one of the main reasons why stocks have come roaring back in such a short period of time is the $ trillions of dollars in liquidity that the Federal Reserve and our government has injected into the markets and the economy. In fact, the Federal Reserve has quietly indicated that it is possible that they themselves would buy stocks if needed. Talk about establishing a floor in the stock market!

Another key development in the markets is how strong the technicals look right now. Without a doubt the leadership group of this recent rally is the Nasdaq Composite (see chart here). Tech stocks have benefited the most due to the lockdown. There are more people online than ever before, hence more sales accordingly. Since mid-April, not only has the Nasdaq cleared its 200-day moving average, it also has cleared its 50, 100 and 20-day moving averages. So now the Nasdaq is trading above all of its key moving averages which is bullish. Furthermore, the Dow Jones Industrial Average (see chart here) the S&P 500 (see chart here) and the small-cap Russell 2000 have also broken above some key technical resistance levels. Another technical indicator I look at the relative strength index also known as the RSI. At this point in time the aforementioned indexes are not in overbought territory. The RSI is a momentum indicator and when the value level of the RSI goes above 70 stocks or indexes begin to become overbought. This is currently not the case.

Good luck to all 🙂

~George

A Breakout Or A Fake-out - Paula Mahfouz

 

The Bears Are Baffled!

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

Gold gets pummeled!

The price of gold fell below $1,400 an ounce for the first time in over two years. In fact, gold and silver both have lost over 10% of its value in the past two trading sessions. Panic selling has set in with not only key technical support levels being shattered, but fears that Cypress and other European countries may have to sell their gold reserves in order to generate liquidity. In addition, slower than expected Q1 growth out of China also added to the panic selling. This capitulation type selling has spilled over to the majority of the gold miners with the gold miners ETF (Symbol: GDX) chart losing over 20% of its value over the past couple of trading sessions. Folks this type of panic selling is what can happen once technicals and fundamentals breakdown and fear takes over. In looking at the most popular ETF that tracks the price of gold (Symbol: GLD) chart, it appears that a multi-year support zone could be found in the $128.00 area which is now only a few dollars away. However, when you have panic selling, margin call selling, institutional and hedge fund selling, all bets are off pertaining to technicals until the smoke clears and cooler heads prevail.

As far as the equities markets are concerned, this is a big week for Q1 earnings reports. We will hear from the likes of Coca-Cola (NYSE: KO), Goldman Sachs (NYSE: GS), Johnson & Johnson (NYSE: JNJ), Intel (NasdaqGS: INTC) Yahoo (NasdaqGS: YHOO), Bank of America (NYSE: BAC), American Express (NYSE: AXP) and Ebay (NasdaqGS: EBAY) just to name a few.

Good luck to all and have a great week 🙂

~George

Central banks boost stocks…

After China announced a surprise rate cut last week, central bankers from Japan to Britain went on the record this week indicating they are ready to flood the system with liquidity if need be. This was enough to continue to fuel the key indices to one month highs. The Dow Jones Industrial Average (chart) closed the week up 1.70%, the Nasdaq (chart) +0.50%, the S&P 500 (chart) +1.30% and the Russell 2000 (chart) +0.28%.

I thought you were supposed to sell in May and go away? Apparently not this year. The concern I have here is that the markets are rallying on stimulus hopes and not fundamentals. In looking at the most recent economic data released this week, manufacturing activity is falling sharply, consumer sentiment is at its lowest level in months and unemployment is still a big threat.

Looking ahead to next week, obviously the outcome of the Greek elections will be the highlight for the markets on Monday. One thing is for sure, no matter the what the results are, central banks from around the world are ready to do what it takes to stabilize the financial markets and financial system. This stance taken by the global bankers should continue to bode well for not only equities, but in particular gold. Good luck to all.

Have a great weekend 🙂

~George