Nasdaq

The Melt Up Continues…

Posted on by George Mahfouz

Stocks continued their march north this past week as once again both the Dow Jones Industrial Average (chart) and the S&P 500 (chart) hit record highs on Thursday. Joining in on the action was the Nasdaq composite (chart) which hit a 52-week high on Thursday as well, while the small-cap Russell 2000 (chart) essentially closed flat on the week. We will talk more about this index in a bit.

With the mid-term elections in the rear view mirror and as the Thanksgiving holiday approaches, I do not see any reason as to why stocks in general won’t continue to post gains. Third quarter earnings reporting season for the most part has ended, and the scorecard was okay. You might look at the technical’s in the marketplace and see that we are at or heading into overbought territory. But when you have volatility coming in, the Thanksgiving holiday fast approaching and with no other real catalyst in the near term, it’s a perfect set-up for the status quo to remain in place. Here is the one exception; the small-cap Russell 2000 (chart). As the aforementioned key indexes have made all time highs, the Russell 2000 is lagging. Yes, this index too has rallied over 10% since the selloff in October, however, the Russell is running into significant resistance at the 1200 level, and actually has reversed course over the past two trading sessions (chart). It’s a bit early to call it a true reversal or a tell, but I will be keeping a close eye on how this key barometer pertaining to overall market sentiment will perform between now and year-end.

As far as the overbought conditions we find ourselves in according to the relative strength index, also known as the RSI, this is a prototypical environment where volatility is coming down and with not too many catalysts in the near term, I would not be surprised if we remain overbought through the end of the year. Good luck to all and both Paula and I wish everyone a Happy Thanksgiving holiday.

Have a great week 🙂

~George

Back To Setting Records!

Posted on by George Mahfouz

After a tumultuous and volatile month, stocks are back to their old habits. The Dow Jones Industrial Average (chart) and the S&P (chart) 500 both closed at record highs. The month of October also saw the Nasdaq (chart) finish up over 3% and the small-cap Russell 2000 (chart) closed the month out up an eye-popping 6.5%. So as far as the long awaited correction goes, lets take a look. The Dow (chart) from it’s previous all-time high corrected 8.61%, while the S&P 500 (chart) retraced 9.83% by mid-October. Not quite the text book healthy 10% correction most investors were looking for, but close enough. The question I have is, will this snap-back rally to new all-time highs hold? Earnings for the most part have been coming in pretty good, however I have not seen the robust top-line growth you would expect in order to keep setting new records. Nonetheless, easy global monetary policies continue to keep not only a floor under these markets, but provide enough juice to lift the markets to new highs. Just yesterday the Bank of Japan unexpectedly raised its bond buying program from JPY 70 trillion to 80 trillion and it also tripled its ETF buying to JPY 3 trillion. So as long as the federal reserves from around the world continue to increase their balance sheets, the bulls should have the upper hand.

The concern I have with the most recent market correction is that it didn’t last very long. It’s true that over the past five years most modest pullbacks immediately snapped back, just like this latest quasi-correction did. Personally, I would of liked the correction to last a little longer and go a little deeper for it feel like a meaningful correction. Because of the markets most recent snap back rally, all of the major averages are now fast approaching overbought conditions according the the Relative Strength Index (RSI). I truly think early next week will be the tell. If we continue to lift, then we will certainly breach the 70 value level of the RSI and enter into overbought territory and possibly remain overbought for the rest of the year. However, if the rally stalls, we could easily reverse and then who knows? Add the wildcard of mid-term elections this upcoming week into the mix, and most likely volatility comes back into the forefront. For me I am going to the sidelines until after the mid-term elections are over, and also to see if we stall here at record levels. Good luck to all and have a great weekend 🙂

~George

 

Stocks Go On A Wild Ride!

Posted on by George Mahfouz

Stocks have been on a torrid sell-off over the past week or so capitulating today with the Dow Jones Industrial Average (chart) dropping over 460 points intraday, then rebounding to close down 173.45 points. At least I think this could of been a capitulation day, maybe not? That said, this is the steepest intraday drop for the industrials in over three years. Same rings true for the Nasdaq (chart), this technology based index was down over 100 points intraday only to rebound closing down a modest 12 points. Also, the S&P 500 (chart) finished the day lower by 15 points and the small-cap Russell 2000 (chart) after being down sharply most of the day actually closed in the green by 10.85 points.

In my previous blog, I eluded to the fact that volatility is back and that Q3 earnings reporting was about to begin, so not only is volatility back, I believe it is here to stay for an extended period of time. And as far as earnings is concerned, now I am not so sure if this earnings reporting season will have a positive effect on the markets. Just take a look at bank stocks which began to report their results this week and even after their impressive quarterly results, their stocks got pulled down with the rest of the market. What’s more, for companies that miss their numbers in this type of environment, look out below. Perfect example here is Netflix (NasdaqGS: NFLX). After the bell, the company reported their quarterly results which missed analysts expectations and Netflix also guided lower for the upcoming quarter. The net result for their stock is a blood bath in after-hours trading. Netflix is down over $110 points, trading now in the $330 range. This is not a typo. It goes back to stocks that miss on their numbers or guide lower, these assets will be taken out to the woodshed first, and asked questions later. I believe this is the environment we now find ourselves in.

It has been years since we have seen this type of market environment and I certainly will not forget the steep market sell-offs of the past. Furthermore, most every financial pundit out there has been calling for a market correction and now you have got it. So I would expect once the dust settles here we should find a base of support at some point and begin to see stabilization in the marketplace. However, and as I mentioned above, I do expect volatility to be back to normalized levels and be around for a while, so if you choose to take any new positions on, most likely they will go lower before they go higher, so a scale in and small incremental approach might be best. Finally and especially now, it’s usually a good idea to consult with a trusted certified financial planner(s) before composing any investment strategy. Good luck to all, and Paula and I wish everyone a safe and Happy Halloween 🙂

~George

 

Volatility Is Back, Q3 Earnings Reporting Season On Deck…

Posted on by George Mahfouz

After being in hibernation for most of the year, volatility is back at the forefront of the markets. The Volatility Index Symbol: VIX (chart) has spiked about 50% over the past couple of weeks which is a clear indication that investors are starting to get a bit nervous and fearful of the markets. The VIX demonstrates the next 30-day expectation of market volatility by calculating the implied volatilities of both puts and calls options of S&P 500 companies. Even the Dow Jones Industrial Average (chart) have experienced intraday triple digit swings over the past several trading days, something we have not seen in a long time. I think it is safe to say that the increase in vol is due in part to the markets continuing to post record highs, the fact that the federal reserve will be ending its asset purchase program this month and seemingly everyday now headlines of geopolitical uncertainty are abound . Furthermore, with the third quarter of the year now in the books, earnings reporting season is upon us. I don’t think it’s a coincidence that volatility has increased with all of the aforementioned factors in play. In fact, this particular earnings reporting season will  most likely be put under the microscope like no other recent quarter. Stocks have enjoyed the the accommodative policies of the Fed for the past several years and now one of the key components of the stimulus program will end here in October. As I mentioned in my previous blog, it will be up to corporate America to stand on its own two feet and begin to demonstrate top-line growth as they grow their earnings. Over the past couple of years many corporations have grown their bottom line by way of becoming more efficient, reducing their workforce and implementing stock buyback programs. I believe going forward financial engineering and in-house efficiencies won’t be enough to satisfy investors appetites.

As the third quarter ends and technically speaking, the Dow Jones Industrial Average (chart), the Nasdaq (chart), and the S&P 500 (chart) appear to be finding some support at their respective 50-day moving averages, however, the small-cap Russell 2000 (chart) continues to lag the big-caps and trade well below its 50-day and 200-day moving average. That said, what is impressive to me is even though volatility has picked up steam, most every pullback is met with support from willing buyers and sell-offs appear to be short lived. The concern I have is whether or not this pattern of support continues. As mentioned, Q3 earnings reporting season is on deck and I do not believe companies will be given free passes anymore to modest top-line growth. If you are a trader, this is type of environment that you have been waiting for. However, if you are an investor with a longer term view, then it is time to look at the intrinsic value of your holdings to reduce the impact of a higher vol environment. Also, options premiums tend to increase along with higher volatility which could bode well for option sellers. Whatever the case is, as we enter the last quarter of the year, I expect volatiily to continue and at points increase, which could create some panic selling and create great opportunities with the right companies. I am looking forward to this upcoming earnings reporting season and will look for oversold conditions to act.

Have a great October 🙂

~George

 

Once Again, All Eyes On The Fed…

Posted on by George Mahfouz

Stocks closed lower last week for the first weekly decline of the broad indices in over a month. The Dow Jones Industrial Average (chart) closed the week down 1%, the Nasdaq (chart) -0.3%, the S&P 500 (chart) closed lower by 1.1% and the small-cap Russell 2000 (chart) also finished the week lower by almost 1%. I suppose a bit of a pullback was overdue considering how much the market has gained over the past five weeks or so. Some of the chatter is that this most recent weakness is due in part to the upcoming Fed policy meeting next week, and the expectation that the Fed is on the brink of changing its language pertaining to interest rates. Between strong economic growth and healthy corporate balance sheets, it’s no wonder analysts are expecting a shift in demeanor over at the Fed. Furthermore, oil has dropped significantly since late June which is finally beginning to show up at the pump. Lower gas prices is a positive for the consumer which could add more fuel to the economy, no pun intended. But wait a minute, the job market recently has done an about face with less hirings occurring in the month of August, which could give the Federal Reserve a reason not to put the brakes on so quickly. Personally, I think the Fed will become a bit more vocal   regarding rising rates over the coming months.

So what could this mean for stocks in the near term? For one, I expect more volatility between now and year end. Especially as it pertains to the upcoming third quarter earnings reporting season. We all know that the Fed will end its asset purchase program in October, and then next logical step for them is to begin to raise interest rates at some point in time. So corporate America sooner than later will have to stand on its own two feet and show top-line growth in order to appease investors and maintain their valuations. See, the accommodative policies over the past five years or so has in part given companies a pass so to speak if they weren’t growing their top-lines. What a lot of companies have done over the past few years is clean up their balance sheets by becoming more efficient by way of trimming expenses and implementing stock buyback programs. This of course in many instances improved their earnings and bottom lines, while not really growing their top-lines. Which is why I view the upcoming Q3 earnings reporting season as potentially one of the defining moments in this historic bull run we have enjoyed over the past five years. This could also be a “Goldilocks” moment where the Fed ends its asset purchase programs, begins to gently raise rates with minimal inflation in sight, and corporate America demonstrates top-line growth. This is what Janet Yellen and the Federal Reserve would call the perfect set-up. I, like most investors would love to see this theme play-out. However, let’s not forget the multi-trillion dollar balance sheet that the Fed has incurred during this unprecedented time of monetary accommodation, and as of now, no one really knows what type of impact this will ultimately have on our economy and our markets. Good luck to all and have a great week 🙂

~George

 

 

Not Even The Dog Days Of Summer Can Slow Down This Bull!

Posted on by George Mahfouz

Stocks once again defied logic setting records in the month of August, which is typically a soft month for equities. For the month, the Dow Jones Industrial Average (chart) finished up 3.2%, the tech-heavy Nasdaq (chart) closed the month up 4.8%, the S&P 500 (chart) gained 3.8% and the small-cap Russell 2000 (chart) closed the month up 4.85%. Now granted these gains came on relatively low volume, but nonetheless a very impressive performance considering the macro environment we are in especially with the geopolitical concerns in the middle-east and Ukraine. I suppose the U.S. economic numbers that have come out recently is part of the reason why stocks continue to march north. Last Thursday the Commerce Department revised the second quarter U.S. gross domestic product (G.D.P.) number to 4.2% which is quite a healthy expansion of our economy and what’s more, the sources of growth were broad based.

Looking ahead to this month, when traders and investors come back from their summer vacations, they will see all time highs for the S&P 500 (chart), the Dow Jones Industrial Average (chart) and don’t look now, even the Nasdaq (chart) is slowly approaching the 5000 mark, a mark that has not been seen since the tech-bubble of 2000. If you have been bearish or short this market, I do not know what to say other than I feel your pain. We have not had a 10% correction in equities in years now and just the slightest of pullbacks have been met with incessant support. I do not know what is going to break this trend and you know what they say, “the trend is your friend”. Enough of that, seriously, I too have been expecting at least a 5-10% correction, which if you are bullish, you should welcome it. Not only would this be healthy for the markets, in my view it’s getting to the point to where it’s almost required. I am beginning to become a little concerned that should a “black-swan” event occur, and history says “they happen when you least expect it” we could see such a sharp correction, that could trigger margin selling, which would lead to more selling pressure etc., we have all seen this movie before. I am not saying that this will take place, but if it does, and we if don’t have healthy corrections along the way, which we haven’t, this could magnify matters and we would be having a much different discussion.

With all that said, I will continue to monitor the economic numbers this month as well as the technical make-up of the aforementioned indices. Technically speaking, we are now approaching overbought territory according to the relative strength index (RSI). Paula and I wish everyone a very safe and Happy Labor Day 🙂

~George

Is That It?

Posted on by George Mahfouz

After what appeared to be the beginning of a healthy correction in the early part of August, stocks held true to form and rallied back this week even as Ukrainian forces engaged and attacked a Russian armored convoy today. When news leaked about the attack, the markets did reverse their earlier gains and dropped meaningfully only to find support and rebound off sessions lows. The Nasdaq (chart) actually finished the day in the green. If you are long this market and are bullish for the remainder of the year, you have got to feel pretty good about how the markets have responded this week to a very unstable geopolitical global environment. For the week, the Dow Jones Industrial Average (chart) gained 0.66%, the Nasdaq (chart) finished the week up 2.15%, the S&P 500 (chart) +1.215% and the small-cap Russell 2000 (chart) closed the week up 0.91%.

Does this mean we are out of the woods yet? I am not so sure. One thing that I believe will continue is market volatility. There is headline risk and equities are certainly reacting to sudden headlines that come out of Ukraine as well as the middle east. The surprise I think is how resilient the U.S. stock market remains in the midst of the geopolitical risks that are upon us. However, this is the one thing that continues to concern me is the escalation of conflict in not just one region but now in two. One way to insure a portfolio is to buy some protection in the form of S&P 500 puts, and more specifically puts on one the most popular ETF that tracks the S&P 500, the SPDR S&P 500 (NYSE: SPY) (chart). So if you have a long portfolio in equities, by buying put protection with the SPY’s, it is like buying an insurance policy should the equity market experience a correction. Put options go up in value should the equity or index you buy puts in goes down in value. Options are not for everyone and it is usually wise to consult with a certified financial planner(s) before implementing any investment strategy, I am just illustrating one way to protect a long portfolio by way of insuring it to a certain degree.

As far as I am concerned, I will continue to monitor the technical conditions of the aforementioned indexes and look for any signs of overbought or oversold conditions to act upon. As of right now the key indices are not in either condition. Good luck to all 🙂

Have a great weekend.

~George

The Moment Of Truth May Be Upon Us…

Posted on by George Mahfouz

We may be entering a period of where good economic news may be bad for stocks? U.S. gross domestic product bounced back sharply at a seasonally adjusted annual rate of 4% in Q2, according to the Commerce departments G.D.P. report issued on Wednesday. This was surprisingly higher than the consensus forecasts of 3% growth for the second quarter. Now wait a minute, isn’t economic expansion good for stocks? Well not if the markets have relied on ultra low interest rates and assets purchases by the Fed as the cushion and floor to the stock market. Stocks had one of their worst performances of the year yesterday and for the month of July the Dow Jones Industrial Average (chart) lost 1.56%, the tech heavy Nasdaq (chart) gave back 0.87%, the S&P 500 (chart) -1.5% and the small-cap Russell 2000 (chart) closed the month of July lower by an eye-popping 6.1%. Now the question becomes is this the beginning of a longer term trend in the marketplace or just another buying opportunity? Personally, I am a bit concerned over the set-up of the markets in general and it’s no secret a correction in equities has been long overdue. Add to the mix that historically and seasonally, August through October hasn’t been a favorable time for stocks. So I think erring on the side of caution may be the wise thing to do.

Let’s take a look at the technical set-up of the aforementioned key indexes. The first thing I want to look at is whether or not the markets are overbought or oversold according to the RSI principle. The relative strength index a.k.a. the RSI, is a technical indicator that compares the size of moves of both recent gains and losses to determine overbought and oversold conditions. The 70 value level and higher and the 30 value and lower are considered extreme conditions. As of the close of trading yesterday, the Dow Jones Industrial Average (chart) RSI was at 32.09, the Nasdaq (chart) RSI was at the 44.24 value level, the S&P 500 (chart) RSI was at 35.85 and the small-cap Russell 2000 (chart) RSI was at 34.76. So as you can see these key indices are not yet in extreme oversold conditions. From a technical standpoint, my preference is to enter positions only when extreme conditions occur, that is when RSI levels are below 30 or above 70. Of course this position has to be supported by strong fundamentals as well. When you have both factors going for you, chances are the set-up would most likely provide favorable results.

Now another favorite technical indicator of mine are the moving averages. The 20-day, the 50-day and the 200-day are the most popular moving averages certain market technicians utilize. The moving average lines historically provide support and/or resistance depending on which side of the line the asset resides. As of the close of yesterday, the Dow Jones Industrial Average (chart) fell below its 50-day moving average for first time since mid-May, the Nasdaq (chart) fell below its 20-day, however, its still trading above its 50-day and may find some support there? Looking at the S&P 500 (chart), it too has fallen below its 50-day moving average and the small-cap Russell 2000 (chart) has now taken out its 200-day moving average and is technically the weakest index of the group.

So as you can see, the markets are not yet in extreme oversold conditions according the the RSI principle and the moving averages are currently being violated, which may indicate that the selling pressure may not be over. Of course this is only a technical recap of current market conditions which is only one component that can shape the markets. Please remember that it is best to always consider consulting with a certified financial planner(s) before making any adjustments to your portfolio or developing any investment or trading strategies .

Best of luck to all 🙂

~George

First Half Of The Year In The Books, And The Bull Keeps Running…

Posted on by George Mahfouz

After gaining 30% or so in 2013, the markets continue to be on one of the most impressive bull runs in modern history. Here is how the four key indices closed out the first half of 2014: The Dow Jones Industrial Average (chart) finished up 1.5%, the Nasdaq (chart) gained 5.5%, the S&P 500 (chart) advanced 6.1% and the small-cap Russell 2000 (chart) closed out the first half of 2014 up 2.6%. Looking back to the market lows of early 2009, these aforementioned indices have tripled or better in price, which is simply stunning.

I think now is as good a time than any to begin to take a look at how the major averages can continue to rise in spite of almost tripling over the past 5 1/2 years. What could be the catalyst(s) going forward? It’s no secret that the Federal Reserve is scaling back its asset purchases and are scheduled to be finished by year-end, so no surprise there. This in fact is where the bear camp is growling that the end of the Fed stimulus program could be the catalyst to end this historic bull run. What about corporate earnings? In my humble opinion, herein lies the single most important catalyst that will either add fuel to this incessant bull run or put the brakes on it. If it’s the latter, this could also create the first real correction in stocks, something that hasn’t occurred in years.

Investors will not have to wait too much longer for Q2 earnings reporting season is upon us. The first key earnings release that has economic implications will be Alcoa (NYSE: AA) which is due to report next Tuesday after the close. I will be very interested to see the top-line growth of Alcoa which will certainly shed some light as to the health of the global economy. Investors have been bidding up Alcoa most of the year in anticipation of an expanding global backdrop. Another economically sensitive stock at least as it pertains to the consumer is Family Dollar Stores (NSYE: FDO). Family Dollar is scheduled to report their quarterly results next Thursday before the market opens. Then by mid-July we will be in high gear to hear how corporate america fared in Q2. The week of July 14th, earnings are scheduled to come out of American Airlines (NYSE: AAL), American Express (NYSE: AXP), Blackrock ( NYSE: BLK), Citigroup (NYSE: C), Whirlpool Corp (NYSE: WHR), JPMorgan Chase (NYSE: JPM) Goldman Sachs (NYSE: GS), Johnson & Johnson (NYSE: JNJ), Intel (NasdaqGS: INTC), Yahoo (NasdaqGS: YHOO), Bank of America Corp (NYSE: BAC), Ebay (NasdaqGS: EBAY), U.S. Bancorp (NYSE: USB), Yum Brands (NYSE: YUM), Baker Hughes Inc (NYSE: BHI), UnitedHealth Group (NYSE: UNH),  Blackstone Group LP (NYSE: BX), International Business Machine (NYSE: IBM), Google (NasdaqGS: GOOGL), Bank of New York Mellon Corp (NYSE: BK) and General Electric (NYSE: GE) just to name a few. As you can see, I think it is safe to say that by the middle of July or so we will have a pretty good idea of how corporate America is faring.

Please note that in recognition of the 4th of July holiday, the markets will be closing at 1pm E.S.T. on Thursday and is closed on Friday the 4th. Both Paula and I wish everyone a very safe and happy 4th of July 🙂

~George

 

Overbought Conditions and Iraq Weigh In On Stocks…

Posted on by George Mahfouz

After the Dow Jones Industrial Average (chart) and the S&P 500 (chart) set all time highs last Monday, the conflict in Iraq and overbought conditions spun a modest pullback in the key indices. Although some are attributing the selling pressure to the unexpected defeat of the House majority leader Eric Cantor (R., VA).  For the week, the Dow Jones Industrial Average (chart) lost 148.54 points, the tech ladened Nasdaq (chart) -10.75 points, the S&P 500 (chart) -13.28 points and the small-cap Russell 2000 (chart) closed slightly lower on the week. What has been eye popping to me is how complacent and tranquill market participants have been. Over the past several months and especially the past couple weeks, investor sentiment has been extremely bullish which in turn has sent the VIX to multi-year lows. The VIX, also know as the fear gauge, is used as an indicator of investor sentiment. Recently the value of the VIX (chart) hit a trough low of 10.73, its lowest level since 2006. Out of all of the market events that are going on, this indicator has me concerned more than any other. As much as I have been bullish on the overall markets, when sentiment gets this comfortable and the VIX trades this low, historically markets set up for a pullback or even a correction of sorts.

This set-up is just what both the bears and the bulls have been waiting on. I personally have been tempted to short this market considering the historic record breaking run up stocks have had. But I have learned a long time ago is you don’t want to step in front of the Federal Reserve or a freight train either, which is what this market has been. So my preference is to be patient, wait for whatever pullback(s) or correction we may get, and then begin to scale in on certain long positions. I will refer to the technical set-ups of indexes and certain equities to assist me in establishing entry points. Click here to see what I look at pertaining to technical analysis. Now whether you are a technical trader or fundamental investor, the fact remains that markets remain awash with liquidity thanks to the Fed, and there really is no where else to get the alpha that hedge funds and institutional investor alike need for their performance mandates. So knowing that these institutions really dictate the ebbs and flows of the markets, my bets will continue to align with theirs and over the past few years whenever we do experience an increase in market volatility and market pullbacks, a buy signal usually ensues. Please remember it is always wise to at least consult with a certified and trusted financial advisor(s) before you compose any investment strategy or make any investment decisions. Good luck to all.

Happy Father’s Day 🙂

~George