overbought

Dow 16000+, Nasdaq 4000+, S&P 500 1800+, Russell 2000 1100+! Records Continue to Shatter!!

Posted on by George Mahfouz

As we are now in the final month of the trading year, some of the top key indices  continue to set records. For the month on November, the Dow Jones Industrial Average (chart) finished up 3.48% closing at 16086.41, the tech-heavy Nasdaq (chart)  was up 3.57% closing the month at a 13 year high of 4059.88, the S&P 500 (chart) advanced 2.8% in November closing at a record high of 1805.18 and the small-cap Russell 2000 (chart) closed the month of November up 3.88% at 1142.89, yet another record. I think one of the reasons why the markets continue to lift into year-end is that most pundits do not believe that they can. There is not a day that goes by where “bubble” is not one of the top headlines in print, online or on the tube. That said, in my last blog I highlighted the current technicals of the top key indexes and in particular the Relative Strength Index (RSI) technical indicator. Well in the last two weeks or so both the Dow (chart) and the Nasdaq (chart) have now breached the 70 value level with the S&P 500 (chart) and the Russell 2000 (chart) not too far behind. The 70 value level according to one of the RSI principles is an overbought condition. If you go back historically and analyze what typically happens when an index or equity for that matter enters into an overbought condition, the majority of the time a “reversion to the mean“ occurs. Now this is not to say that overbought conditions in an index or stock instantly changes course, however, typically at some point in time a reversion does indeed occur. Now with that said, I have seen indexes and stocks remain overbought for weeks and months at a time before a natural reversion occurs, but it’s something to keep an eye on especially if you have long term gains in your portfolio or if you are a trader and have the gumption to consider a short strategy in this parabolic market.

As this broad rally continues and as we are now in overbought conditions in certain key indexes, one has to wonder what will it take for a “reversion to the mean?” to occur? At this point in time in the calendar year, I am not sure? With only one month left to go in 2013 and with third quarter earnings reporting season behind us, a Federal Reserve that continues to be extremely dovish and fund managers year-end window dressing upon us, whatever pullback (if any) that may occur between now and year-end should be met with anxious support. I just do not see any type of a imminent catalyst that would jar these markets significantly, unless some unforeseen macro/geopolitical event happens, which of course is always a possibility. Should an unexpected negative geopolitical event occur, this in my opinion would be one of the only conditions between now and year end that could create a “reversion to the mean” type scenario that most bears have been waiting on.

Good luck to all 🙂

~George

No Bubble Here…

Posted on by George Mahfouz

At least according to Janet Yellen as she spoke before the Senate Banking Committee on Thursday. In a prepared speech to the committee, Vice Chair Yellen stated that the U.S. economy continues to improve and that the housing market has turned a corner with construction, home prices and sales up significantly. Ms. Yellen went on to indicate that she supports the Federal Reserve’s monetary policies which continue to purchase bonds and mortgage backed securities. Investors took this cue as a very positive sign going forward and sent the markets yet again to all time highs this past week.

For the week, the Dow Jones Industrial Average (chart) closed up 1.3% and is also closing in on the 16,000 mark, the S&P 500 (chart) gained 1.6%, the Nasdaq (chart) +1.5% and the small-cap Russell 2000 (chart) finished the week up 1.47%. Stocks continue to be on a tear and now it is clear that unless their is some unforeseen negative macro-event that occurs from now until year end, these markets should close the year out with over 20% gains respectively. Now that doesn’t mean that pullbacks or even a modest correction couldn’t occur, but should this be the case, I would assume that any retracement would be met with the “buying the dip” mentally that has gone on all year long.

Now let’s take a look at how the technical conditions are shaping up for the aformentioned key indices. When I consider running a technical analysis on stocks or indexes, the two indicators I favor the most are the Relative Strength Index also know as the RSI and the moving averages. Out of plethora of technical indicators out there, these particular indicators are the most reliable, at least for me. Part of the reason why I favor the RSI and moving averages indicators are that many computerized trading models and certain institutional investors utilize them, which in turn moves the market. Historically, when the Relative Strength Index (RSI) is at an overbought or oversold condition, the majority of the time the asset or index reverts back to the mean. Same rings true with the moving averages, whenever a stock or index rises up against or comes down to its moving average, typically the stock or index finds support or resistance. So in looking at the current state of the Dow (chart), S&P 500 (chart) , Nasdaq (chart) and the Russell 2000 (chart) all of these indexes are indeed approaching overbought territory which according to the RSI definition is the 70 value level, but they are not there yet. Actually, my personal preference is to not only see a breach of the 70 value level but a continuation up into overbought territory before I consider selling into that condition. As it pertains to the moving averages technical indicator, these key indices are all comfortably above their respective 20-day and 50-day averages, with the 200-day moving average no where in sight.

So what does all of this mean? Technically speaking and considering we are heading into year end, there is a high likelihood that markets continue to head north, but I will be paying close attention to the technicals as to when we may see the inevitable pullback.

Good luck to all and have a great weekend 🙂

~George

Technically speaking…

Posted on by George Mahfouz

Stocks finished lower for the week as volatility continued to rise. For the week, the  Dow Jones Industrial Average (chart) closed down 1.17%, the Nasdaq (chart) -1.32%, the S&P 500 (chart) -1.01% and the small-cap Russell 2000 (chart) closed the week lower by 0.63%. Is this bull market beginning to show signs of fatigue or is this just a typical pre-summer pullback? Let’s take a look at the technical picture of these key indices and see what’s going on there.

Market technicians use a multitude of indicators to discern potential support or resistance levels. My preference has always been to keep things as simple as possible when analyzing charts of stocks or indices. The two indicators I pay the closet attention to is the Relative Strength Index also know as the RSI and the moving averages. Out of dozens of technical indicators that are available, you may ask why do I prefer these particular indicators? The answer simply is that high profile market technicians,  computerized trading models and certain institutional investors utilize them.  Time and time again when I see that Relative Strength Index (RSI) is indicating an overbought or oversold condition, the majority of the time the asset or index reverts to the mean. Same rings true with the 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.

Let’s break this down in more detail. Pertaining to the (RSI), The RSI is designed to demonstrate whether or not an index or equity is overbought or oversold, depending on certain value levels. According to the RSI principle, the 70 value level or greater, is an overbought condition and the 30 value and below is an oversold condition. 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 the moving averages these indices remain above their 50-day moving average and as you can see with the Dow Jones Industrial Average (chart) and S&P 500 (chart), these indexes have bounced off their 50-day moving averages/support lines three times over the past week or so which clearly demonstrates the potential of the power and precision of this particular technical indicator.

So technically speaking, I see nothing that would indicate an extreme condition of these indexes and as long as their are no major surprises out of the FOMC meeting next week, we should see smooth sailing heading into the summer. Good luck to all.

Have a great weekend 🙂

~George

Flat week…

Posted on by George Mahfouz

The four key indices finished the week basically unchanged, however, after the run stocks have had so far this year, the bulls will take it. For the week, the Dow Jones Industrial Average (chart) finished lower by 0.08%, the Nasdaq (chart) by -0.06%, the S&P 500 (chart) and the Russell 2000 (chart) actually ticked up on the week by 0.12% and 1.04% respectively.

The bears must be scratching their heads and asking; “Where is the pullback or 5-10% correction?” Without question the market has been churning and consolidating for the past several trading sessions and if  you have been short, or have been putting on new short positions, there may be a need for concern. My expectations have been calling for some type of pullback which in fact would be healthy for stocks. However, one thing I have learned over the years is you cannot fight the tape or for that matter, the fed. As long as you have the Federal Reserve commiting and deploying an exorbitant amount of resources and liquidity to the markets, you will most likely have a bid underneath most equities.

Technically speaking, the major indexes remain in overbought territory and when there is a pullback or correction in the averages, I would expect it will be met with willing and able buyers. Good luck to all.

The markets are closed on Monday for President’s Day so enjoy the extended holiday weekend 🙂

~George Mahfouz

Let’s talk technicals…

Posted on by George Mahfouz

As certain stocks and markets continue to unexpectedly plow to new 52 week highs, I think it’s time to look at the technical aspect of the indexes. For the week, the Dow Jones Industrial Average (chart) finished up 0.51%, the Nasdaq (chart) +1.84%, the S&P 500 (chart) +0.87% and the Russell 2000 (chart) +2.29%. I do not remember a time when equities have behaved this well in the month of August, albeit on very low volume.

Now to the technicals. I typically refer to two of the more popular technical indicators that certain market technicians, program trading models and even institutional investors utilize, and they are, the Relative Strength Index (RSI) and the Moving Averages technical indicators. The RSI is designed to demonstrate whether or not an index or equity is overbought or oversold, depending on certain value levels. According to the RSI principle, the 70 value level or greater, is an overbought condition and the 30 value and below is an oversold condition. Pertaining to the moving averages, the 50-day and the more closely monitored 200-day moving average, are the key markers that market technicians and program trading models look for and potentially act on.

In looking at the four major averages, they are all currently trading considerably above their respective 50-day and 200-day moving averages. However, both the Nasdaq (chart) and the S&P 500 (chart) is on the cusp of breaking through the 70 value level on the RSI. Furthermore, the Dow Jones Industrial Average (chart) and the Russell 2000 (chart) are not too far behind trading around the 65 value level. This is an indication that the markets are potentially becoming overbought and are due for some type of pullback. Please keep in mind that stocks can remain overbought or oversold for extended periods of time. That said, when the RSI on a given equity or index begins to trade at or above this key level, a reversal of some sort typically occurs. Now there are many other factors and technical indicators to refer to when analyzing market conditions, but my preference is to keep it simple when looking at the technicals, and the RSI and moving averages indicators do it for me. Good luck to all.

Have a great weekend 🙂

~George