Nasdaq

Where are they now?

Posted on by George Mahfouz

Just a mere 2 weeks ago the pundits came out in full force declaring the end of the bull market or at the very least a 10-20% correction for stocks. Fast forward to today and we find ourselves yet again in record breaking territory. For the month of May, the Dow Jones Industrial Average (chart) closed up 0.82% at a new record closing high of 16,717.17, the Nasdaq (chart) closed the month up 3.11% at 4242.61, the S&P 500 (chart) closed at an all time record high of 1923.57 and the small-cap Russell 2000 (chart) closed out May up 0.68% at 1134.50.

In my previous blogĀ I wrote about certain experts calling for an imminent correction in which I thought was a bit pre-mature considering how the Federal Reserve continues to accommodate the economy and the markets. I understand where the bear camp is coming from, as soon as the Fed begins to hike interest rates, we should indeed see the markets react accordingly. The problem with the sell-side thesis is this just isn’t happening now. Policymakers continue to reiterate their stance on interest rates which are to remain low for the foreseeable future as the bond tapering program continues and ultimately exhausts itself, which could be by year-end. Then I think bear growl may have a lot more punch to it.

So how do we continue to make money in an environment that continues to make record highs seemingly with no end in sight? In addition to honoring the power of the Fed, I will continue to refer to the technical shape of the key indices to spot opportunities as we wait for the second quarter to wind down. With the incessant “melt-up” of the markets, one may think that stocks maybe overbought a bit. This most certainly is the case with select individual stocks, however, as I look at the closely followed Dow (chart), Nasdaq (chart), S&P 500 (chart) and the Russell 2000 (chart), none of these indexes are in overbought territory at least according to their respective Relative Strength Indexes. Remember, the Relative Strength Index (RSI) is a technical indicator which signifies whether or not a stock or index is overbought or oversold, with the 70 plus value level indicating an overbought condition, and the 30 minus level indicating an oversold condition. Click here for the expanded definition of the RSI. In addition, all of the moving averages are intact for the aforementioned indexes. Click here for the moving averages definition.

So as we enter the month of June, I am expecting the continuation of the “melt up” that has occurred so far this year with modest pullbacks. Of course as we witnessed in mid-May, sentiment can change quickly and the pundits and press for that matter can spread fear like wild fire, and should this be the case, I will prepare myself to add to certain long positions to take advantage of any potential weakness. As always, it is best practice to consult with a trusted financial advisor(s) before making any investment decisions. Good luck to all šŸ™‚

~George

 

 

Record Close! Sure Doesn’t Feel Like It…

Posted on by George Mahfouz

The Dow Jones Industrial Average (chart) ended the month of April at a closing record finishing at 16,580.84. The Nasdaq (chart) closed the month out down 2%, the S&P 500 (chart) finished the month slightly up and the small-cap Russell 2000 (chart) lagged the markets closing down 4% at 1,126.85. Stocks have see-sawed all year long which is why for me, it does not feel like a record close. Another reason why we don’t feel like we are in record territory is we are seeing a lot of momentum stocks begin to lose their mojo, in particular Amazon (NasdaqGS: AMZN), Netflix (NasdaqGS: NFLX) and biotech momentum favorite Biogen Idec (NasdaqGS: BIIB) just to name a few.

That said, as Q1 earnings reporting season continues, companies continue to produce better than expected profits for the most part, which is one of the reasons why stocks have shown impressive resilience. The vitality of corporate America is quite remarkable considering the paltry 0.1% annualized growth rate our economy experienced in the first quarter. So now that we are in May, will the old adage “sell in May and go away” apply this year? I am not so sure. Let’s not forget interest rates remain near record lows, the Fed is still buying bond assets to help stimulate the economy albeit at a slower pace, and the technicals of the market are not in bad shape.

Let’s take a gander at the current technical setup of the aforementioned key indexes.Ā The two technical indicators I pay the closet attention to is theĀ Relative Strength IndexĀ a.k.a. theĀ RSI,Ā and theĀ moving averages. Out of hundreds of technical indicators available, I have found that these particular indicators work the best for me. In technical analysis, I like to keep things simple and not place too many indicators into the mix. It also helps that certain high profile market technicians, computerized trading models and certain institutional investors utilize the RSI and moving averages as their core technical indicators in their trading models. Ā Time and time again when I see that theĀ Relative Strength IndexĀ (RSI)Ā of a given index or equity is in an overbought or oversold condition, the majority of the time the asset or index reverts back to the mean. Typically the same rings true with theĀ moving averages, whenever a stock or index bumps up against or comes down to its moving average, typically the stock or index finds support or resistance. Letā€™s break this down in more detail. Pertaining to theĀ (RSI),Ā TheĀ RSIĀ is designed to demonstrate whether or not an index or stock is overbought or oversold, depending on certain value levels. According to theĀ RSIĀ principle, the 70 value level or greater, is an overbought condition and the 30 value and below is an oversold condition. As of right now, the aforementioned indices are hovering around the 50 value level +/- which is not indicating an extreme condition either way. Looking at theĀ moving averages,Ā of these four indexes, 2 of the 4 remain above their 50-day and 200-day moving averages and as you can see with the small-cap Russell 2000 (chart), this index has recently been finding support and bouncing off of its 200-day moving average,Ā which clearly demonstrates the powerful support that moving averages can provide.

So again, I am not so sure if the “sell in May and go away” will apply this year based on how the technical set-up appears, how corporate America is coming in with their surprising earnings report cards and a continuing accommodative Fed. Good luck to all and happy trading in the month of May šŸ™‚

~George

Q1 Earnings Reporting Season Saves The Day, So Far…

Posted on by George Mahfouz

Last week the Dow Jones Industrial AverageĀ (chart), the Nasdaq (chart), the S&P 500 (chart) and the small-cap Russell 2000 (chart) all went into a tailspin closing lower by 2.4%, 3.1%, 2.6% and 3.6% respectively. Fast forward to this week as earnings reporting season shifted in to high gear and we have a different story. For this holiday shortened week, the Dow Jones Industrial Average (chart) finished up 2.38%, the Nasdaq (chart) closed up 2.395%, the S&P 500 (chart) gained 2.7% and the small-cap Russell 2000 (chart) closed the week up 2.38%.

So why the reversal? Simply put and for the most part, corporate earnings are coming in better than expected. At the beginning of the week Citigroup (NYSE: C) posted better than expected results on net income of $3.94 billion up from $3.81 billion in Q1 2013. This was after Wells Fargo (NYSE: WFC) posted a sharp rise in its net income in comparison to last year’s quarterly results. Also this week, Johnson and Johnson (NYSE: JNJ) reported a net income of $4.4 billion an almost 8% increase over the same period last year. The Coca-Cola Co. (NYSE: KO) reported their Q1 earnings booking 44 cents share which is what the street expected as global sales volume rose 2%. Furthermore, Intel (NasdaqGS: INTC) reported 38 cents a share in earnings which came in 1 cent above what analysts expected, this was enough to send Intel to fresh 52-week highs. Ā Yet another impressive earnings report came out of flash based data storage firm SanDisk (NasdaqGS: SNDK) which surprised the street and reported record Q1 results of $1.44 per share leapfrogging street estimates of $1.25 per share. This was enough to send the shares of the company up over 7% in today’s trading session.

As previously mentioned, earnings reporting season kicked into high gear this week and next week we go into overdrive. At the beginning of this upcoming week, we will here fromĀ Halliburton (NYSE: HAL),Ā Wynn Resorts (NasdaqGS: WYNN), AK Steel (NYSE: AKS), Amgen (NasdaqGS: AMGN), Bank of New York Mellon (NYSE: BK), Cree Inc. (NasdaqGS: CREE), Discover Financial Services (NYSE: DFS), Gilead Sciences (NYSE: GILD), Juniper Networks (Nasdaq: JNPR), Intuitive Surgical (NasdaqGS: ISRG) and United Technologies Corp (NYSE: UTX). Mid-week earnings will come out of tech behemoth Apple (NasdaqGS: AAPL), Biogen Idec (NasdaqGS: BIIB), Delta Airlines (NYSE: DAL), Dow Chemical (NYSE: DOW), F5 Networks (NasdaqGS: FFIV), Facebook (NasdaqGS: FB) and Qualcomm (NasdaqGS: QCOM). Closing out the week we will hear from 3M Company (NYSE: MMM), Amazon (NasdaqGS: AMZN), American Airlines (NYSE: AAL), Chinese search engine Baudi (NasdaqGS: BIDU), Cabot Oil & Gas (NYSE: COG), Celgene Corp (NasdaqGS: CELG), Eli Lilly and Company (NYSE: LLY), General Motors (NYSE: GM), KLA-Tencor (NasdaqGS: KLAC), Microsoft (NasdaqGS: MSFT), United Parcel Service (NYSE: UPS) and Ford Motor Company (NYSE: F). Of course there are hundreds of others reporting their earnings next week so we will see if the market continues to rebound from its mini sell-off earlier in the month. Good luck to all.

The markets will be closed tomorrow in recognition of Good Friday and both Paula and I wish everyone a very safe and healthy holiday weekend šŸ™‚

~George

 

A Ho Hum Q1…

Posted on by George Mahfouz

It doesn’t seem like it, but for the first quarter of the year the four major averages were essentially flat. For the quarter, the Dow Jones Industrial Average (chart) closed basically unchanged, the tech heavy Nasdaq (chart) finished up just over 1% percent, the S&P 500 (chart) +2.2% and the small-cap Russell 2000 (chart) closed out Q1 slightly up. Quite an uneventful quarter at least from a P&L standpoint especially considering China’s economic slow down and the Ukraine crisis that unfolded in the quarter. There was a period in late January in which we saw a sharp 5% decline only to be met with unconditional support, followed by a rally which led the markets back to almost unchanged on the year.

As I always do at the end of each quarter, I look at the technical conditions of the aforementioned indexes and how they are shaping up going into a new quarter. There are plenty ofĀ market technicians out there that use a variety of techniques and indicators to identify trends and where the markets may be headed. My preference is to keep things as simple as possible when conducting technical analysis. As you may know by now, two of my favorite technical indicators are the Ā Relative Strength IndexĀ also know as theĀ RSIĀ and theĀ moving averages. Part of the reason why I prefer these two reliable indicators over most is it is now seemingly more than everĀ computerized trading models are emphasizing the RSI and the 20-day, 50-day, 100 and 200-day moving averages in their models. These indicators also have been a long time favorite of institutional investors. So it’s no wonder that when theĀ Relative Strength IndexĀ (RSI)Ā is indicating an overbought or oversold condition in an index or equity, more times than not, the asset finds support and changes direction. The same can be said for theĀ moving averages, whenever a stock or index bumps up against or comes down to its moving average, typically the stock or index finds support or resistance.

Letā€™s break this down in more detail starting with theĀ (RSI),Ā TheĀ RSIĀ is designed to demonstrate whether or not an index or equity is overbought or oversold, depending on certain value levels. According to theĀ RSIĀ principle, the 70 value level or greater, is an overbought condition and the 30 value and below is an oversold condition. Looking at the aforementioned indices now, there is no indication of an overbought or over sold condition. However, both the Nasdaq (chart) and the small-cap Russell 2000 (chart) are trading and have closed below their 50-day moving averages. These two indices have been leading the markets higher and now comparatively speaking, they have begun to lag, a potential short term ominous sign. Now it has only been a couple of days that both of these indexes have been trading below this support line so we will have to wait and see if this turns into a longer term trend.

That said, we will not have to wait much longer. This Friday’s jobs report will shed light as to the health of the labor market and don’t look now but Q1 earnings reporting season is on deck. Without a doubt, Q1 earnings reporting season will be placed under a microscope to see if corporate America and the markets deserve their current valuations. Personally, I think a rather healthy pullback may be in the cards for equities and if so, most likely, the trend of unconditional support will come back into the markets as well.

Good luck to all. šŸ™‚

~George

Global Concerns Give Markets A Pause…

Posted on by George Mahfouz

Stocks had a very volatile week as tensions elevated in Ukraine and now China has seemingly hit a soft patch in its economy. For the week, the Dow Jones Industrial Average (chart) fell 2..35%, the Nasdaq (chart) gave back 2.09%, the S&P 500 (chart) -1.96% and the small-cap Russell 2000 (chart) ended the week lower by 1.82%. I do not think the most recent retreat in stocks is anything beyond the current global headline risks as our own economy appears to be intact and growing, albeit modestly. Some economists believe China will maintain a 7.5% growth rate this year while other pundits believe a cooling off of China’s economy would affect our markets here. Should the latter be the case, I would assume the Chinese government would take measures to help prop up their economy by injecting enough stimulus to ensure the targeted 7.5% growth rate for 2014 would not be breached. Recently, the economic numbers across the board coming out of China has been weaker than expected, especially in the manufacturing and export sectors.

This past week also saw an escalation in the crisis in Ukraine with both sides increasing the chatter about a potential military conflict as protests have become extremely violent. Governments from around the world are now are attempting to assist in the negotiations with Russia and Ukraine to formalize some type of accord. So it’s no surprise that a “risk off” mentality has come into the markets for the time being. I do believe that once things settle down in the Ukraine and the China headlines become less frequent, we could consolidate here for a bit as the first quarter of the year winds down. Then of course as we enter into April, all eyes will be watching how corporate America fared during the first quarter as Q1 earnings reporting season will begin. Between now and the end of March, I will be paying closer attention to our own economic data which will most likely translate into companies Q1 earnings reports.

Technically speaking, the Dow Jones Industrial Average (chart), the Nasdaq (chart), the S&P 500 (chart) and the Russell 2000 (chart) all appear to be heading towards their respective 50-day moving averages, in fact the Dow (chart) Ā actually breached its 50-day on Friday. The 50-day moving average is a technical indicator I favor as do other certain market technicians. Historically, when stocks or indexes reach their 50-day or 200-day moving averageĀ for that matter, support is typically found and a reversal of the stock or index ensues. The moving averages are also followed by certain institutional investors and select computerized algorithmic trading models, which could also be a reason why the moving averages can act as a support mechanism. Now I am not suggesting that the moving averages are infallible, I personally utilize this indicator mainly from a technical standpoint to help me navigate current market opportunities. Good luck to all.

Have a great weekend šŸ™‚

~George

 

What Correction?

Posted on by George Mahfouz

I think it’s safe to say that the bulls took back control of the stock market, at least for now. After what seemingly was the beginning of a meaningful market correction in late January, stocks closed the month of February at or near record levels. For the month, the Dow Jones Industrial Average (chart) finished up 3.96%, the tech focused Nasdaq (chart) closed up almost 5%, the broad based S&P 500 (chart) closed at a new record high of 1859.45 and was up 4.3% in February, and the small-cap Russell 2000 (chart) finished the month in the green by 4.6%.

So what changed from the apparent sell-off in late January to today? In my view, absolutely nothing. We still have a very accommodative Fed, interest rates remain near zero and a new Fed chairwomen that essentially emulates the former head of the Federal Reserve Ben Bernanke, and his policies. Hence, markets remain flush with cash with no where else to go but into higher yielding assets. This in my humble opinion is why equities snapped back from their January declines and why new highs are occurring. The bears are wondering how much longer can this go on without sparking a potential problematic inflationary environment. The bears are also growling about the bubbly type market we find ourselves in with valuations beginning to get stretched a bit and the apparent stratospheric $19 billion price tag that Facebook (NasdaqGS: FB) recently paid for the 55 employee app company WhatsApp. Then you have electric car maker Tesla this week receiving a price target boost from Morgan Stanley (NYSE: MS) to $320 dollars, which is more than double what Morgan’s previous target price was. Other data supporting the bear thesis is margin interest remains at all time highs and the retail individual investor is coming back to life according to online trading discount brokers TD Ameritrade (NYSE: AMTD) and Charles Schwab (NYSE: SCHW) which are seeing a surge in trading activity.Ā Some pundits argue that this is the type of market behavior that is conducive with market tops. All valid points. My take is both the bulls and bears have valid points, but personally I cannot bet against the power of the central bank and their incessant support of the markets. When and only when the asset purchase program concludes and when interest rates begin to rise, we can then have a different type of discussion.

That said, we can easily see pullbacks and corrective type actions in the marketplace like we witnessed in late January. When volatility does come back, I would expect a similar pattern of market participants coming in looking for potential bargains, and thus placing yet another floor under these markets. On the technical front, it appears that all systems a go with none of the key indices in overbought territory yet according to the Relative Strength Index (RSI) however, yesterday we did see a “quasi-reversal” of sorts in where we closed well below the sessions highs after the S&P 500 (chart) hit an all time intraday high. This reversal was apparently due in large part to the increasing tensions in the Ukraine late Friday afternoon, which is something I will pay close attention to next week. Ā In closing, whether you are bullish or bearish, make sure to always consider having protective stops in place with your positions which is designed to protect your portfolio against unexpected losses.

Have a great weekend šŸ™‚

~George

Now That’s What I Call A Bounce!

Posted on by George Mahfouz

After such a torrid bull run in 2013, where the the four major averages gained over 25%, to no great surprise, these same indexes experienced more than a 5% pullback in January and early February. However, over the past couple of weeks and true to form, these indexes not only bounced off of key technical support zones, but they also took back their 50-day moving averages. For the week, the Dow Jones Industrial Average (chart) finished up 2.28%, the Nasdaq (chart) had a gain of 2.86%, the S&P 500 (chart) +2.32% and the small-cap Russell 2000 (chart) closed the week up 2.92%. The markets responded with a roar asĀ the new Fed chairwomenĀ Janet Yellen, in her first public appearance at the helm of the Fed, reiterated her commitment to model after the Bernanke era monetary policies. Stocks were already recovering from the January correction but accelerated their gains as she spoke to Congress this past Tuesday. All expectations now are that stocks will remain buoyed by the continuing asset backed purchases despite the modest tapering that is now in effect.

In my previous blog I expressed concern over the technical breakdown of the markets and that the 50-day moving averages of the key indices had been breached. Furthermore, I thought there was a possibility of the 200-day being the next stop. However, I did also indicate that if the markets were able to rebound and take back their 50-day and remain above that mark, that would be a positive. This is where we find ourselves now. All of the aforementioned key indexes have traded and closed above this key technical metric. The question now becomes whether or not this slingshot bounce and break above the 50-day is sustainable? Q4 earnings reporting season really didn’t say too much about the growth of corporate America, which overall was a mixed bag at best for the majority of the sectors. Couple this with economic signs of weakness as retail sales growth still remains flatlined, and I think we will continue to experience choppy waters for stocks, and I would be surprised if we began making new high after new high like last year. That said, liquidityĀ for stocks is seemingly plentiful and we are still in a strong seasonality period for equities, so I also wouldn’t be surprised if we stabilized above the 50-day and consolidated for an extended period of time. Unless of course there is an unexpected negative geopolitical or global macro event that creeps back into the mix, then all bets are off. I will continue to track the technicals to gauge entry and exit points while using protective stops along the way. Good luck to all and both Paula and I wish everyone a very safe and happy Presidents’ Day holiday. Please note the markets are closed on Monday in recognition of Presidents’ Day.

Have a great weekend šŸ™‚

~George

A Mixed Bag…

Posted on by George Mahfouz

At the height of Q4 earnings reporting season, results from corporate America have been conflicted, so far. Let’s start with everyone’s favorite, Apple (NasdaqGM: AAPL). Despite sales of its iPhone hitting records during the holiday season, those sales were shy of what the street was expecting by three million units. Furthermore, during the conference call after its earnings release on Monday, management projected a softer outlook for the upcoming quarter amid growing competition in the smartphone and tablet marketplace. This was enough to send Apple’s shares lower by over 10% this past week. In fact, the majority of the retailers have reported very disappointing results this earnings reporting season with the widely followed and traded retail SPDR S&P Retail ETF (NYSE Arca: XRT) (chart) down almost 10% for the month of January.

Now let’s take a look at the results of the four key indices so far this year. For the month of January, the Dow Jones Industrial Average (chart) is down 5.3%, the tech-heavy Nasdaq (chart) is off by 1.7%, the S&P 500 (chart) is lower by 3.6% and the small-cap Russell 2000 (chart) finished the month down by 2.8%. In my January 1st blog, I eluded to expecting a 5%, 10% or even a 15% correction in 2014, and we could very well be in this corrective phase as we speak. The question now to investors and traders alike is how steep could this current pullback become? Let’s not forget we are coming off of a year in which these key indexes individually gained well over 25%, with the Nasdaq leading the way gaining a whopping 38% in 2013. What I try to do is tune out all of the noise that comes out of the financial cable channels and media and focus on seasonal patterns and the technicals of the market. Technically speaking, the markets are not yet in an extreme oversold condition according to the RSI principles. Remember the Relative Strength Index a.k.a. the RSI is one of my favorite technical indicators where overbought and oversold conditions are exhibited depending on certain value levels. In this case and according to the RSI principle, the 30 value level and below is considered oversold and anything below 20 is considered extremely oversold. We are just not there yet. However, one thing I do want to highlight is for the first time in months the aforementioned key indices have all fallen and closed below their 50-day moving averages. Something that has not occurred since early October of last year and something we want to keep an eye on. If the markets cannot rise back and remain above their 50-day in the near future, the 200-day support line could be the next real support for these markets. I am not suggesting that we will test the 200-day moving average, but if this is the case, the selling pressure would most likely continue and may actually increase. Let’s see how next week’s earnings reports come in before we draw any further conclusions.

Looking ahead to next week, we will here earnings results from petroleum producer Anadarko (NYSE: APC), real estate investment trust Annaly Capital Management (NYSE: NLY), Yum Brands (NYSE: YUM), Boston Scientific Corp Ā (NYSE: BSX), retailer Michael Kors (NYSE: KORS), Cognizant Technology Solutions Corp (NasdaqGS: CTSH), Green Mountain Coffee Roasters (NasdaqGS: GMCR), Pandora Media (NYSE: P), AOL Inc. (NYSE: AOL), Expedia (NasdaqGS: EXPE), General Motors (NYSE: GM), Verisign Inc. (NasdaqGS: VRSN), Apollo Global Management (NYSE: APO), Flir Systems (NasdaqGS: FLIR) and Moody’s Corp (NYSE: MCO) just to name a few. So as earnings reporting season continues, so do the markets. Good luck to all.

Have a great weekend šŸ™‚

~George

Q4 Earnings Reporting Season Is Here…

Posted on by George Mahfouz

And so far, it’s a mixed bag. As this earnings reporting season kicks into high gear, most of the banks that have reported so far have come in above consensus estimates with Citigroup (NYSE: C) being one notable exception. Citigroup did report a $2.69 billion dollar profit, however, this was below consensus estimates and the bank did cite weakness in their mortgage and fixed income divisions. The stock closed lower by over 4% on the day. Another sector that is being challenged so far this year is the retail sector, at least certain companies within the sector such as Best Buy (NYSE: BBY). Although Best Buy did not report their earnings, they did come out with their holiday same store sales today which were significantly below analysts’ expectations and the company lowered their guidance due to disappointing holiday sales. On that news, the street hammered Best Buy’s stock today sending its shares lower by $10.74 per share or almost 30% on over 85 million shares in volume. This type of massive volume compared to a typical volume day of around 6 million, could be considered a washout orĀ capitulation type trading day, hence a potentially sharp bounce back and potential recovery in its share price? Let’s see how the next couple of trading sessions play out on Best Buy before we draw any conclusions on a potential snap back rally.

Now let’s take a look on how the key indices are faring so far this year starting with the Dow Jones Industrial Average (chart)Ā which is down 1%, the Nasdaq (chart) is up 1%, the S&P 500 (chart) is essentially flat, and the small-cap Russell 2000 (chart)Ā has gained about 1% since the beginning of the year. So as you can see, a mixed bag here as well with the benchmark indexes.

Looking ahead to tomorrow’s key earnings reports, we will hear from the likes of General Electric (NYSE: GE), Morgan Stanley (NYSE: MS), Bank of New York Mellon Corp (NYSE: BK), and Schlumberger (NYSE: SLB) just to name of few. Next week we will hear from powerhouses International Business Machine (NYSE: IBM), Johnson & Johnson (NYSE: JNJ), Halliburton (NYSE: HAL), Abbot Labs (NYSE: ABT), Freeport-McMoRan Copper & Gold (NYSE: FCX), U.S. Bancorp (NYSE: USB), and Honeywell (NYSE: HON). Of course there are hundreds of other companies reporting next week as well, but I will be paying closer attention to the aforementioned companies due to their reach in the economy here and abroad.

I think this earnings reporting season will be scrutinized more than any other in recent years. Everyone wants to see top-line growth out of corporate America to confirm what the most recent economic data has revealed. With that said, and with what we have seen come out of certain slices of the retail sector, I am expecting a bumpy ride between now and the end of Q4 earnings reporting season. Good luck to all and make sure to consider havingĀ protective stops in your portfolios. The markets will be closed on Monday due to the MLK holiday.

Have a great holiday weekend šŸ™‚

~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 NasdaqĀ (chart)Ā 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, theĀ RSIĀ is designed to demonstrate whether or not an index or equity is overbought or oversold, depending on certain value levels. According to theĀ RSIĀ 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%,Ā 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.Ā 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 šŸ™‚

~George