protective stops

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

 

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. 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.  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 🙂

~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 or 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) 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) 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 having protective stops in your portfolios. The markets will be closed on Monday due to the MLK holiday.

Have a great holiday weekend 🙂

~George

 

 

Unconditional support continues…

Posted on by George Mahfouz

The Federal Reserve’s incessant support of asset prices continues to propel stocks to all time highs. The S&P 500 (chart) closed out the month of April at a record high of 1597.57. For the month, the Dow Jones Industrial Average (chart) closed up 1.79%, the Nasdaq (chart) +1.88% and the small-cap Russell 2000 (chart) finished the month gaining about 1%. Records are being broken despite the lackluster job growth in our country, a weaker than expected GDP report issued last Friday, and a mixed bag of Q1 corporate earnings reports.

Not to sound like a broken record, but as long as the economy stays stuck in neutral, QE3 should remain in full effect, which is what I expect to hear when the Federal Reserve concludes their two day meeting this afternoon. This mantra should also continue to be bullish for stocks and act as a catalyst for support should we get the pullback or market correction that the bears have been chatting up all year long. To add even more fuel to the fire, you now have central banks from around the world opening up their balance sheets in further support of their own economies. I am not so sure that the old adage of “sell in May and go away” will apply this year just from the mere power and seemingly collaborative efforts of the world wide central bankers. Logically, this cannot continue to be the case, but for now it is super charging the markets.

Technically speaking and from a relative strength perspective, the four key indices are below the 70 value level of the RSI which is considered overbought territory, and therefore could very well be consolidating for the next leg up. Of course, the market is way overdue for some type of pullback. I have been expecting this for months now and whenever there is any type of selling pressure, it has been met with undeniable support. Best of luck in the month of May and remember it is typically a good idea to use protective stops in any position you enter into especially with the amazing double digit run stocks have had so far this year.

Have a great May 🙂

~George

 

 

Dow record in sight…

Posted on by George Mahfouz

Stocks continue to head north this week with the Dow Jones Industrial Average (chart) flirting with an all time high. For the week, the Dow (chart) closed up 0.64%  just 74 points away from notching a record, the Nasdaq (chart) finished the week up 0.25%, the S&P 500 (chart) +0.17% and the small-cap Russell 2000 (chart) closed the week out basically flat. Looking at the year to date performances of these key indices and you will see eye-popping gains of 7.52%, 4.98%, 6.45% and 7.70% respectively.

This wasn’t the case on Monday when the markets nerves were tested with fears of instability out of Italy and the ongoing sequester uncertainty here at home. This sent stocks spiraling with the Dow shredding over 200 points. However, true to its form, stocks regained their footing on Tuesday and throughout the rest of the week once again demonstrating how resilient equities are in this Fed friendly environment. Even Gold bounced off of its recent lows to close at $1572.30 a troy ounce, although still trending downward.

Looking ahead to next week, I am cautiously optimistic that we could see a record on the Dow with the caveat of headline risks out of Washington. If the sequester issue does not get some type of formidable resolution out of Congress, we will most likely see consumer confidence rattled and market confidence challenged. Chances are neither side of the aisle wants to be held responsible for the looming automatic spending cuts which in turn would be a serious blow to our fragile economy. Nonetheless, it would be wise to tread these markets carefully and make sure to always consider using protective stops in your portfolio. Good luck to all.

Have a great weekend and profitable March 🙂

~George

A bull stampede!

Posted on by George Mahfouz

Stocks are on a rampage with the Dow Jones Industrial Average (chart) surpassing and closing above the 14,000 mark for the first time in over five years. For the week, the Dow Jones Industrial Average (chart) finished up 0.89% the Nasdaq (chart) +0.93%, the S&P 500 (chart) +0.68% and the small-cap the Russell 2000 (chart) closed the week up 0.66%. For the month of January both the Dow Jones Industrial Average and the S&P 500 had its best showing in decades.

So why so much bullishness? Well for starters, before the market opened today the non-farm payroll number came out and 157,000 new jobs were added to the economy. Good, right? Not so fast. The unemployment rate actually ticked up to 7.9% in January and furthermore, the economy needs to add at least 250,000 new jobs per month in order to make a meaningful dent in the unemployment rate . So you ask, “how can this be good for stocks?” Here is the oxymoron. As long as the economic numbers remain tepid, the federal reserve will continue its stimulus program(s) which in turn bodes very well for stocks. A zero to a quarter percent interest rate environment forces money off of the sidelines that is seeking a respectable yield. This especially rings true for fund managers and institutional money managers who really must produce higher than average returns to appease their investors.

For me personally this type of market environment is very difficult to navigate. On one hand you have the fed ready to expand their balance sheet which in turn fuels stocks, and on the other hand you have a weak economy which should translate to lower equity prices. Instead, this market is making multi-year highs across the board. Without question stocks are way overbought and are due for a healthy pullback. If you dare to short this market in attempt to call a short term top, make sure you have explicit protective stops in place. The same discipline should also be honored if you open any new long positions. Going forward, I am expecting some type of pullback which would probably be met with noticeable support at least in the short term. Good luck to all.

Have a great weekend 🙂

~George

 

Snap back rally!

Posted on by George Mahfouz

Bulls took charge this holiday shortened trading week sending the four key indices up over 3%, albeit on light volume. The Dow Jones Industrial Average (chart) closed the week at 13009.68, the Nasdaq (chart) 2966.85, the S&P 500 (chart) 1409.15, and the small-cap Russell 2000 (chart) finished the week above 800. This after weeks of incessant selling pressure which created extreme oversold conditions. What also boosted equities this past week was the kickoff to the 2012 holiday shopping season and early reports of long lines and busy shopping malls.

The week ahead promises to be volatile as politics once again takes center stage. Congress and the President will meet to negotiate and hopefully move towards a resolution of the fiscal cliff dilemma facing our country. Although the fiscal cliff scenario continues to grab headlines, I am also keeping a close eye on the geopolitical backdrop out of the middle east and Europe. To me all of the above is enough risk to not get too comfortable with last weeks rally and to have protective stops in any and all positions. Good luck to all.

Have a great weekend 🙂

~George

Whatever it takes…

Posted on by George Mahfouz

That was the message sent mid-week by European Central Bank President Mario Draghi. That statement alone was enough to spike the markets into a breathtaking three-day rally pushing the Dow Jones Industrial Average (chart) above the 13,000 mark for the first time in since early May. For the week, the Dow Jones Industrial Average (chart) finished up almost 2%, the Nasdaq (chart) +1.12%, the S&P 500 (chart) +1.71% and the Russell 2000 (chart) +0.56%.

As a trader or investor it has become somewhat challenging to form a thesis on the markets. Despite weakening economic data and tepid corporate earnings, equities continue to outperform the data. Logically, one could surmise based on the weak data and somber outlook, a short thesis could be developed and implemented. However, when you have the central banks from around the world ready to provide consistent stimulus measures, and have a “whatever it takes attitude”, equities benefit.

I am not sure how much longer these stimulus resolutions will have a positive effect on stocks, however, if you try to short this market in this environment, make sure you have protective stops in on all of your positions. Good luck to all.

Have a great weekend 🙂

~George