portfolio

Earnings Take Center Stage…

Posted on by George Mahfouz

Earnings reporting season begins in earnest this week which could play a role in determining whether or not the bull market has more room to run. This past Friday the money center banks kicked off the reporting season as JP Morgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) recorded eye popping profits while Wells Fargo (NYSE: WFC) continues to deal with the aftermath of the “fake-accounts” debacle that rocked the bank last year.

As I look at the charts of the key indexes, I do see a potential technical catalyst looming. The Dow Jones Industrial Average (chart), the S&P 500 (chart) and the small-cap Russell 2000 (chart) all share similar and current chart patterns. Over the past month or so, these key indices have been consolidating and trading in a tight range and when you have a looming catalyst such as earnings reporting season, most likely this pattern will breakout or breakdown. The Nasdaq (chart) does not fit this consolidation profile yet as it has been making new highs and leading the pack so far this year. Another technical set-up I look for is overbought or oversold conditions. Seemingly we have been in overbought conditions since the election but technically we are not according to the relative strength index also known as the RSI.

In my previous blog I did write about my expectation of increased volatility as we headed into January and earnings reporting season and how to hedge yourself against such volatility. To my surprise, vol has remained relatively low so far, however, there are catalysts looming as described above. As far as protecting a portfolio against any future volatility, there are many ways to do so but the most effective and simplest way is to buy S&P 500 puts. Especially while vol is low and premiums are relatively cheap. So if you have a “long only” portfolio buying some protection in the form of S&P 500 put options might not be a bad idea. Of course it is always best to consult a certified financial planner(s) before making any investment decisions or any adjustments to your current portfolio. My goal is to bring light to strategies that can be helpful to you that certain managers might not cover.

Good luck to all 🙂

~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

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