Ninth

Stocks Are In A Tailspin!

Posted on by George Mahfouz

After starting the year off in sell mode, stocks are accelerating their declines and are now in correction territory. Yesterday’s rally sparked hope that a short term bottom was put in, however, this is not the case as the Dow Jones Industrial Average (chart) plunged 400 points at today’s open, the Nasdaq (chart) opened lower by over 100 points, the S&P 500 (chart) opened down over 2% and the small-cap Russell 2000 (chart) is now trading below 1000. What gives? First and foremost, China’s Shanghai Composite Index has lost over 20% of its value since late December and is now in a bear market. China’s market fall has indeed spilled over into the global markets. Secondly, crude oil (chart) has continued to decline and is now trading below $30 per bbl spreading fears of widespread bankruptcies in the oil and gas space. These two factors alone have been enough to send our markets into correction mode.

That said, what I try to do in this type of market environment is to place emotions in check and to keep things into perspective. Since this bull market began in 2009, we have not really experienced a market correction. Yes, it has been over six years since we have had a meaningful market decline that has stuck. People tend to forget that market corrections can be a very healthy thing for an overextended market. Investors and traders alike have been spoiled over the past six years by essentially taking their positions and switching on auto-pilot. I believe those days are gone and they should be. When the Federal Reserve took action and began their aggressive monetary policies i.e. buying bonds and placing interest rates at or near zero, stocks took off and did not look back. We have not been in a normalized market environment since then.

Fast forward to today and with essentially no Fed intervention and with a change in interest rate policy, we now have markets trading off of economic and corporate merits. This to me is not a bad thing because now investors can assess the value of the markets as well as individual stocks more accurately and more confidently. This is a concept that most traders and investors have been waiting on and that is to make their investment decisions based off of facts and not what the Federal Reserve will or will not do.

Good luck to all 🙂

~George

Finally The Fed Raises Rates!

Posted on by George Mahfouz

After 9 years of essentiality zero percent interest rates, the Federal Reserve today raised its benchmark interest rate one quarter of one point. Investor’s embraced the Fed’s action lifting all of the key major averages. The Dow Jones Industrial Average (chart) closed up 224 points, the Nasdaq (chart) up 76 points, the S&P 500 (chart) up 29 points and the small-cap Russell 2000 (chart) closed out the session up 17 points. The street gained confidence when Fed officials also provided clarity as to their upcoming intentions regarding further rate hikes. Such hikes would only move up between 0.25% and 0.5% and would be subject to future economic activity and data. Another takeaway today is that the Federal Reserve has enough confidence in the current economy to raise rates and confidence in future growth in the foreseeable future. If you are bullish on the markets it doesn’t get better than this. Which is a tepid Federal Reserve while considering raising rates and an economic backdrop that seemingly is demonstrating growth albeit in a moderate manner.

So which sectors could benefit the most from a rising interest rate environment? One sector I will turn my attention to is the banking sector. Banks tend to earn more when rates move up simply because they can charge more interest on the loans they make. There are individual bank names that one can consider but for me personally I would rather position myself in the largest banking exchange traded fund (ETF) Symbol: XLF. The XLF’s top holdings include the likes of Wells Fargo & Company (NYSE: WFC), JP Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) Citigroup (NYSE: C) and Goldman Sachs (NYSE: GS) just to name a few. So you get the diversity of multiple money center banks and other banking related institutions which spreads out some risk. That said, it is best practice to consult with your financial advisor(s) before making any investment decisions.

I do think that investors and traders alike can now breathe a sigh of relief now that the Fed has made its first move and the markets cheered that with enthusiasm. Good luck to all!

Both Paula and I wish everyone a very safe and happy holiday season 🙂

~George

Are Stocks Poised To Breakout?

Posted on by George Mahfouz

After an early November sell-off, the major averages could be on the verge of a breakout, at least from a technical point of view. The noticeable dip in equities that occurred recently was met with strong support and now stocks have rallied up to key resistance levels. The Dow Jones Industrial Average (chart) closed the month of November at 17720, the Nasdaq (chart) closed at 5109, the S&P 500 (chart) closed at 2075 and the small-cap Russell 2000 (chart) closed the month of November at 1198. As you can see by their charts the three top indices have resistance levels of 18,000, 5175 and 2125 respectively while the small-cap Russell 2000 (chart) is seemingly on the verge of breaking out. That said, it takes more than a day or two trading above a resistance level with strong volume to confirm a breakout. What could be in favor for a breakout with all of the aforementioned indexes is the seasonality of the markets a.k.a. the Santa Clause rally. This could very well be the catalyst for a year-end rally.

What could get in the way of a potential Santa Clause rally? One example could be if the technical resistance line(s) holds true to form and the key indices cannot breakout with conviction above these marks . There is also the risk of China’s market continuing to abate as regulators are cracking down on trading practices of major Chinese brokerage firms. The China weakness can spill over here to our shores even if it is only a short-term consequence. Of course there is always a geo-political risk that could weigh in on market sentiment and behavior. And last but not least, the Good Ole Federal Reserve and whether or not they would implement their first rate hike in almost a decade when they meet later this month.

That said and notwithstanding any of these risks, we have seen stocks incredibly resilient during this multi-year bull run and I would not be surprised if we indeed breakout and experience a year-end rally that could challenge the all time highs. Good luck to all 🙂

~George

Strong Month For Stocks!

Posted on by George Mahfouz

Much to my surprise and to the surprise of many investors and traders alike, the major averages in October posted eye-popping results. For the month, the Dow Jones Industrial Average (chart) gained 8.7%, the tech-f0cused Nasdaq (chart) gained almost 10%, the S&P 500 (chart) notched an 8.3% gain and the small-cap Russell 2000 (chart) closed the month out up 5.55%. Yes almost double digit gains for the Dow, Nasdaq and the S&P 500. Now wait a minute, I thought the month of October is supposed to be one of the weakest months of the year for equities. I think in large part earnings reporting season has been a pleasant surprise to most investors and a continuing subdued Federal Reserve is responsible for the most recent gains and confidence in stocks. That said, I do think that this latest market run has been a bit too much too fast.

A quick look at the Relative Strength Index of the aforementioned indexes might also confirm my belief. The relative strength index is also referred to as the RSI. This particular indicator is one of the most watched technical indicators by seasoned traders and investors alike. The RSI compares the size of moves of gains and losses in a given period of time to highlight whether a stock or index is overbought or oversold. According to the RSI principles, the 70 value level or greater is considered an overbought condition and the 30 value level or lower is considered oversold. And as you can see with the Dow Jones Industrial Average (chart), the Nasdaq (chart) and the S&P 500 (chart), all three indexes recently hit or breached their respective 70-value line and reversed course on Friday. Now that does not mean that these indices could not break back through the 70 value level and continue onto higher levels and remain overbought for an extended period of time. What I am saying is that historically and from a technical point of view, the relative strength index has been quite reliable when markets overshoot to the up or down side.

We are now in the final two months of the trading year and let’s see how the markets react to this initial pullback we saw on Friday and whether or not this is the beginning of a slight correction to this extraordinary market run we experienced last month.

Good luck to all 🙂

~George

Rough Quarter For Stocks…

Posted on by George Mahfouz

Although the markets rallied yesterday, the major averages in Q3 closed lower for the second straight month. In fact, year to date the Dow Jones Industrial Average (chart) is down 8.6%, the Nasdaq (chart) is off by 2.5%, the S&P 500 (chart) is lower by 6.8% and the small-cap Russell 2000 (chart) year to date is down 8.6%. So the bulls are asking what gives? My question is more of what has taken so long? The U.S. markets have not seen any kind of meaningful or long lasting correction in six years. This is not a surprise and if anything should be embraced. Stocks have been driven by the Federal Reserve policies ever since the introduction of the first quantitative easing mandate. How easy has this market been? All any investor or fund manager really had to do over the past 6 years is buy and hold with no need for concern. I think it’s safe to say the landscape is changing and rightfully so. There are many investors out there that missed this stunning bull run we have been on simply because it was hard to agree with the valuations that most of the market has enjoyed during the Federal Reserve buyback program and low interest rate stance. Top-line growth has really not been the catalyst that has driven stocks during this incessant bull market. However, when you are in a low to negative interest rate environment there really isn’t any other option to place funds. The question now is are we heading towards or already in a normalized market environment? Meaning will equities now begin to trade on their own merits? To me it certainly feels like the markets are setting up this way.

We won’t have to wait very long because third quarter earnings reporting season is just ahead. Without question I expect this upcoming earnings reporting season will be scrutinized like no other in recent memory. I believe gone are the days that investors will give any company a pass should their results come in under street estimates or even in-line with the street. For me personally there is too much volatility in the marketplace right now and my preference is to go to the sidelines until after Q3 earnings reporting season is over. I will then evaluate the landscape from a fundamental and technical point of view. Speaking of the technical shape of the market, this too of a concern of mine. All of the key indices are in a significant down trend trading well below their respective 200-day moving averages. Yes theses indexes are finding a bit of support right here, but if earnings reporting season doesn’t add up, new 52 week or even multi-year lows could be in the cards? My point here is that with the way the markets look and feel, it is probably best to be a bit more conservative until after we see the health and growth rate of corporate America. Good luck to all 🙂

~George

Stocks Skittish Before The Fed Meeting…

Posted on by George Mahfouz

Stocks have become hesitant as to which direction to head into with all eyes now on whether the Federal Reserve will raise interest rates this week for the first time in almost a decade. The Dow Jones Industrial Average (chart) started the week down 62.13, the Nasdaq Composite (chart) closed Monday’s session out down 16.58, the S&P 500 (chart) fell 8 points and the small-cap Russell 2000 (chart) closed modest lower by 4.3 points.

As investors and traders await the decision from the Federal Reserve as to whether or not a rate increase will occur, I think the markets are putting too much emphasis on the initial hike, regardless if it’s announced after the conclusion of their two-day meeting this week. To me what’s more is how will the Federal Reserve respond over the coming months and quarters ahead? Shouldn’t we be more attuned to their behavior pattern after the first hike? Or whether or not they will raise rates at an accelerated rate? To me this is the bigger question. Of course a quarter point rate hike or even a 50 basis point hike is in the cards and is inevitable at some point in time, whether it’s this week or at the Federal Reserve’s future meetings. My focus and attention will be on how they treat the interest rate environment after the first rate hike actually occurs. Based on the temperament and demeanor of Janet Yellen, I would expect a continuing cautious protocol from our Fed Chair and I would think that neither she or the Fed would not be inclined to raise rates too fast. I would think the economic data would dictate the velocity of future rate hikes and even if the data becomes robust, the Federal Reserve would want to see multiple quarters of meaningful expansion before we get back to normalized rates.

That said, I do think that the markets and investors are going to need to get used to increased volatility and market swings similar to what we have been experiencing over the past few months. I believe gone are the days of low vol and indeed investors are going to need to pay attention now more than ever to the true growth rates of companies, especially on the top-line. You see in a rising interest rate environment companies can no longer grow their bottom line alone while maintaining high valuations. Real growth needs to come forward in the form actual sales expansion in addition to productivity in order for companies to maintain elevated P/E multiples. Bottom line, you better know the companies you choose to invest in because the free lunch so to speak that the markets, investors and traders have enjoyed over the past several years may come to a close in the near future…

Good luck to all 🙂

~George

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

Despite A Pop In Volatility, Bull Market Remains Intact!

Posted on by George Mahfouz

In the month of July, the major averages continued to demonstrate what a bull market looks like despite an increase in volatility $VIX (chart )and global macro concerns. For the month, the Dow Jones Industrial Average (chart) closed up a modest 0.40%, the Nasdaq (chart) gained 2.8% in July, the S&P 500 (chart) advanced 2.0% and the small-cap Russell 2000 (chart) actually ticked down on the month giving up 1.28%. One interesting note and if you look at the charts of the above mentioned indices, in the month of July each of these indexes breached their 200-day moving average and three of the four breached this support line twice only to rebound sharply and keep the technical makeup of the markets intact. Without question and throughout this six year long bull run, the technicals of stocks and indexes have done their job and has acted as technicians would expect.

Fast forward to today August 1st and if you have been on Wall Street long enough, yes we are now entering the dog days of summer. As Q2 earnings reporting season works its way through and begins to wind down, I would expect volatility also begin to abate as it has towards the latter part of this past week. Without question these markets could still react to China’s extreme volatility as of late or if there is a big surprise in next week’s job’s report, however, without any big surprise here or overseas, I think this becomes a stock-pickers market as well as a technically traded market paying attention to trend lines and overbought and oversold conditions. This could also be the perfect environment to sell put option premium on your most favorite stocks in order to generate some additional income. One other option which may be a very valid one, and that is turn off your screens and head to the beach until after Labor Day :-).

Whatever you choose to do as we enter the “dogs days of summer” it is always best practice to consult with a certified financial planner(s) before making any investment decisions or changes to your portfolio. Good luck to all 🙂

~George

Nasdaq Closes At A Record High!

Posted on by George Mahfouz

Tech stocks have taken off this week due to their strong earnings results. Companies such as Netflix (NasdaqGS: NFLX) soared 18% today after the company reported better than expected subscriber growth. Also today and just after the close, Google (NasdaqGS: GOOGL)  too reported better than expected results with revenue coming in at $14.35 billion compared to $14.26 billion the street was expecting. In after hours trading Google is up over 10% or well over $70.00 per share. Thanks to Google’s earnings results, most other tech companies are also trading up in the after-hours session so it appears that the rally on the Nasdaq (chart) will continue at least through tomorrow.

On a technical note, I want to point to your attention how two of the most influential major averages held their respective 200-day moving averages recently. A little over a week ago the markets were roiled in the Greece debt drama as well as how China’s stock market was falling off a cliff. There was enormous uncertainty as to how Greece and even more so how China’s stock market would play out. This fear and uncertainty sent the Dow Jones Industrial Average (chart) and the S&P 500 (chart)  tumbling down toward and below their 200-day moving averages. It really only took a day for this key support metric to kick in and demonstrate its technical support influence. Since this brief but noticeable selloff occurred, both indices have snapped back and we now find the S&P 500 (chart) within 10 points of its all-time high. Some pundits did indeed expect that Q2 earning reporting season could be the catalyst to lift the markets out of the fears of Greece and China. And seemingly their expectations have been met. That said, there are many more companies set to report their earnings results over the next couple of weeks, with all eyes now focusing on how Apple (NasdaqGS: AAPL) will fare as they are set to report their quarterly report next Tuesday July 21st after the close. As with most earnings reporting seasons over the past few years, stocks have overall fared well and this time it appears well enough to break key index records.

Good luck to all 🙂

~George