Paula Mahfouz

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 as the new Fed chairwomen 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, liquidity 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 🙂

~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 Nasdaq (chart) 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, 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. 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%, 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. 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 🙂

~George

Pullback #1

Posted on by George Mahfouz

I have been blogging for while now that a pullback at some point is inevitable and would even be healthy considering the parabolic move most of the key indexes and many stocks have had so far this year. However, there seemingly has not been a meaningful catalyst to trigger a noticeable pullback or better yet a healthy 10% correction, until maybe now? Taper talk is back on the table at the highest level since late May thanks to the continuing flow of recent positive economic data. In fact, some pundits predict that the Federal Reserve will begin reducing its asset purchases as early as this upcoming week. This chatter has been enough for the markets to take notice with the Dow Jones Industrial Average (chart) falling 264 points this week or 1.7%, the Nasdaq (chart) retreated by 1.5%, the S&P 500 (chart) gave back 1.6% and the small-cap Russell 2000 (chart) closed the week lower by 2.2%. Now let’s keep this into perspective, these benchmark indices on the year are still up a whopping 20%, 35.5%, 24.5% and 30% respectively.

What everyone has been accustom to for the past couple of years is that the protractive accommodative policies of the central banks from around the world would keep a floor under the markets, which most certainly has been the case. However, in late May of this year there had been widespread speculation that the Fed would indeed begin to reduce its bond buying and mortgage backed security purchases which sent the markets lower by over 5% by late June. The tapering fear at that point became unfounded as the economic data back then was still coming in too skittish in the Fed’s eyes.

Fast forward to today and there may now be enough positive economic data such as Q3 GDP coming in at 3.6%, the labor market showing signs of strength, personal spending rising and overall business confidence improving. These signs could be enough for the Fed to slowly reduce its asset purchases. So now the question on all minds is “how will stocks react once the Fed begins to taper?” This subject is currently being highly debated in most circles of the financial world and quite frankly no one knows. I suspect that the Fed will start to taper sooner than later but that they would be very conscious and conservative with their approach and how they signal their future actions. That said, once the central bank removes itself from the limelight and allow the markets to trade in a normal environment and on their own merits, I would expect volatility to get back to normal levels, hence, healthy pullbacks and even corrections should be back on the table. With this type of market environment, both long and short traders would be able to compose strategies based off of fundamentals and have the confidence to act accordingly.

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

~George