Russell 2000

Volatility Wakes Up!

Posted on by George Mahfouz

After weeks of tepid volatility (chart)  investors and markets appear a bit jittery with volatility waking up. For the week, the Dow Jones Industrial Average (chart) closed down 1.3%, the tech-focused Nasdaq (chart) closed off 2.7%, the S&P 500 (chart) closed lower by 1.3% and the small-cap Russell 2000 (chart) finished lower on the week by 1.4%. As first quarter earnings reporting season begins to wind down with overall results coming in mixed, we now enter a time of year where weakness in stocks can occur with volatility even more prevalent. The old adage “sell in May and go away” could come into play.

The currents risks to the market as I see it is the market itself as valuations are historically high with the S&P 500 price to earnings ratio trading in the 20’s. Another risk to stocks is the possibility of the Fed raising rates in June.  These catalysts alone could be all that it takes for equities to not only pause but to continue to experience increased volatility as we head into the summer months. So now let’s look at the technical shape of the aforementioned indexes. After trading near or in overbought territory for the past month or so the Dow Jones Industrial Average (chart) broke through its 20-day moving average, the S&P 500 (chart) also broke through its 20-day moving average, however, a bit more troublesome is the Nasdaq (chart)  as it has broke through its 200-day moving average this past week, a moving average that is more closely watched. Finally, the small-cap Russell 2000 (chart) is now sitting right at its 20-day and 200-day moving averages. So the technical shape of the markets at least according to moving averages support lines appear to be breaking down a bit.

So as we head into a typically softer time for equities that is May and June, and considering the current technical shape of the markets, both Paula and I feel it would be best to move to the sidelines and see if the current increase in volatility continues or if this is just a pause in the sharp rally we have seen since the middle of February.

Good luck to all 🙂

~George

Strong Week For Stocks!

Posted on by George Mahfouz

The major averages continue to show strength upon the launch of first quarter earnings reporting season. The Dow Jones Industrial Average (chart) closed the week up 1.8%, the Nasdaq (chart) also closed up 1.8%, the S&P 500 (chart) added 1.6% and the small-cap Russell (chart) 2000 led the charge by closing the week up a whopping 3.1%. The money center banks such as JPMorgan Chase NYSE: JPM (chart), Bank of America NYSE: BAC (chart) and Citigroup NYSE: C (chart) which reported their earnings late in the week did help continue the momentum we have recently seen in the markets.

The question now is can earnings reporting season which begin in earnest next week breakout this market to new highs? Companies that are scheduled to report next week are International Business Machines Corp. NYSE: IBM (chart), Morgan Stanley NYSE: MS (chart), Netflix NasdaqGS: NFLX (chart), Goldman Sachs NYSE: GS (chart), Discover Financial Services NYSE: DFS (chart), Intel Corp. NasdaqGS: INTC (chart), Intuitive Surgical NasdaqGS: ISRG (chart), Johnson & Johnson NYSE: JNJ (chart), TD Ameritrade Holding Corp. NasdaqGS: AMTD (chart), Yahoo! Inc. NasdaqGS: YHOO (chart), American Express NYSE: AXP (chart), Coca-Cola NYSE: KO (chart), Qualcomm NasdaqGS: QCOM (chart), Biogen NasdaqGS: BIIB (chart), E*Trade Financial Corp. NasdaqGS: ETFC (chart), General Motors NYSE: GM (chart), Microsoft Corp. NasdaqGS: MSFT (chart), Southwest Airlines NYSE: LUV (chart), Starbucks NasdaqGS: SBUX (chart), Visa Inc. NYSE: V (chart), American Airlines Group NasdaqGS: AAL (chart), Caterpillar NYSE: CAT (chart) and General Electric NYSE: GE (chart) just to name a few.

Without question the aforementioned earnings reports will play a significant role in whether the key indices will breakout to new highs or struggle at their current resistance levels. One other historic factor that can play into the mix is April tends to be one of the top performing months of the year. Whatever the case is, I think it’s safe to assume a breakout or possibly a breakdown is on the horizon. Good luck to all 🙂

~George

First Quarter In The Books…

Posted on by George Mahfouz

Q1 proved to be a mixed bag for the major averages. The Dow Jones Industrial Average (chart) closed out the first quarter up almost 1.5%, the S&P 500 (chart) finished up 0.77%, however, both the Nasdaq (chart) and the small-cap Russell 2000 (chart) finished out the first quarter of the year lower by 2.75% and 1.78% respectively. Not too shabby considering these key indices were down over 10% earlier in the quarter. This morning stocks are lower despite a stronger than expected  jobs report. In March, the economy added 215,000 jobs with the unemployment rate now at 5%.

With Q1 in the rear view mirror all attention will now be focused on first quarter earnings reporting season. The Commerce Department recently issued a report indicating that corporate profits were down 15% year-over-year. This does not bode well for stocks when the current p/e ratio’s of the major averages are well above their historic averages. With earnings reporting season just ahead, we will not have to wait too much longer to see how well corporate America is doing.

Let’s take a quick look at the technical shape of the markets. Most of the key indices are at or near overbought conditions, which has been the case for pretty much most of March. In my previous blog I eluded to what most market technicians look at when gauging overbought or oversold conditions. Furthermore and technically speaking, the major averages are all trading at or above their 20, 50 and 200-day moving averages with only the small-cap Russell 2000 (chart) chasing its 200-day. If you are bullish on the market, these moving average patterns are typically a good thing. That said, I do expect volatility to pick up a bit which is usually the case ahead of earnings reporting season. I will check back in mid-month or so to see how earnings growth actually appears.

Good luck to all 🙂

~George

Stocks Are Back!

Posted on by George Mahfouz

Since losing over 10 percent of their values and going into correction territory earlier this year, the major averages now find themselves almost back to par. Year-to-date the Dow Jones Industrial Average (chart)  is only down around one percent, the S&P 500 (chart) is also lower by around one percent, the Nasdaq (chart) on the year has gained back over half of its losses and the small-cap Russell 2000 (chart) is lower by 4.5%. Since this bull market began over seven years ago, time and time again stocks have demonstrated astounding resilience. Seemingly every time there is a sell-off, willing buyers are ready to step in at varying support levels and buy up equities.

Today the Federal Reserve left interest rates unchanged and actually slashed their forecast to project only two additional rate hikes for the rest of this year versus the four rate hikes they had originally targeted. Stocks initially popped on the news and only one can conclude that the continuing accommodating monetary policies not only here in the United States, but from around the world is most likely the reason why this seven year bull market continues.

That said, the aforementioned indices are approaching overbought conditions according to the relative strength index. Remember the RSI is one of the favorite technical indicators by market technicians, certain algorithmic programs and institutional investors alike. The relative strength index measures and compares the size of moves in a selected period of time and according to the RSI, the 70 or greater value level signals an overbought condition and the 30 value level or lower indicates an oversold condition. Keep in mind stocks and/or indexes can remain overbought or for that matter oversold for an extended period of time. Currently the Dow Jones Industrial Average (chart) is almost touching the 70 value level and the other indexes are not too far behind. Of course this is only one of many technical indicators that traders and investors utilize, but I have found over the years the RSI is one of the more reliable indicators out there.

Good luck to all 🙂

~George

Volatility Back In Vogue…

Posted on by George Mahfouz

Since the start of the year there has been a very noticeable uptick in volatility in the marketplace. Twice over the past couple of months volatility has spike past the coveted 30 value level which is considered to be the level that demonstrates a large amount of investor uncertainty and/or fear. This you can see clearly in the chart of the Chicago Board Options Exchange Volatility Index, Symbol: VIX (chart). The VIX tracks the S&P 500 and calculates the next 30-day expectation of implied market volatility of a wide range of call and put options related to the S&P 500. Investors have not seen this type of volatility in quite some time and traders and short sellers have certainly taken advantage of it.

Let’s take a look at what the increase in vol has done to the major averages. Year to date the Dow Jones Industrial Average (chart) is down over five percent, the Nasdaq (chart) is lower by almost nine percent, the S&P (chart) is off by over five percent and the small-cap Russell 2000 (chart) is down almost nine percent on the year as well. That said, these key indices have bounced sharply off of their recent lows in mid-Feburary and crude oil (chart) has seemingly found a interim bottom around the $30 dollar level.

So now what? I am expecting volatility to continue throughout the month of March especially as we lead up into the upcoming Federal Reserve policy meeting March 15-16th. Most experts do not expect the Fed to raise interest rates at this meeting and furthermore not until the economic data consistently proves otherwise.  In fact, there are certain economists out there that think that the Federal Reserve is handcuffed for now and won’t raise rates until the fourth quarter because of the global turmoil that has surfaced this year especially in China and Europe. The current global equity sell-off is without question part of the reason for the increase in vol here in the United States. Whatever the case is, I will be listening to what tone and language Janet Yellen will use at her press conference post meeting to get a sense of what’s next for rates and how this will effect our markets.

Good luck to all 🙂

~George

A Respite From The Sell-Off!

Posted on by George Mahfouz

Stocks snapped back sharply on Friday after a week of relentless selling pressure. On Friday the Dow Jones Industrial Average (chart), surged 313.66 points, the Nasdaq (chart) popped 70.67 points, the S&P 500 (chart) notched a gain of 35.70 points and the small-cap Russell 2000 (chart) closed Friday out up 18.27 points. For most of last week the markets were under tremendous pressure as oil continued to plummet along with bank stocks. On Thursday U.S. crude oil closed at a 13-year low only to snap back on Friday gaining over 12%. One of the reasons why oil has bounced off of multi-year lows is a rumor was floating around that the Organization of Petroleum Exporting Countries aka O.P.E.C. was prepared to cut production. We will see if this becomes the case. Furthermore, the European banks have been sold off ruthlessly all year long which has indeed carried over to our banks here at home. So when you have both oil and banks selling off the way that they have, it’s no wonder why there has been a global sell-off sending markets into correction territory.

As the global sell-off continues and as the chatter of doomsday gets louder and louder, I think it is important to remember that we have been in one of the strongest and longest bull markets of all time. Let’s not forget it is not only normal but quite healthy that stocks, bonds and commodities correct and balance out. It amazes me that when sell-offs occur that lead to corrections in the marketplace how the pundits come out of the woodwork and speak to how the world is coming to an end. My friends, what hasn’t been normal is for over six years how we have not had a market correction of over 10% that has stuck. Well here we are today and this is where we find ourselves.

Yes, equities can go lower and yes it can get more painful. But once valuations become attractive again and this is what market corrections provide, you better believe at some point in time buyers will resurface and take advantage of the what goes on sale. The markets are closed on Monday due to Presidents’ Day. Both Paula and I wish everyone a very safe and happy holiday 🙂

~George

 

Despite A Month End Rally, Stocks Took It On The Chin!

Posted on by George Mahfouz

January proved to be one of the toughest months for stocks in years. The Dow Jones Industrial Average (chart) closed the month down 5.5%, the Nasdaq (chart) closed down 8%, the S&P 500 (chart) fell 5.1% and the small-cap Russell 2000 (chart) finished the month out down almost 9%. If it wasn’t for the strong month end rally, both the Nasdaq (chart) and the small-cap Russell 2000 (chart) would of closed out in correction territory. Clearly China and Oil continue to grab the headlines and continue to make investors very nervous. However, on Friday the Bank of Japan in a surprise move implemented negative interest rates for the first time ever in an attempt to aggressively stimulate their struggling economy. So once again a central bank acts and the markets respond. Even our own Federal Reserve stated last Wednesday that they are on high alert pertaining to the global markets and the affects that are being felt here at home. In other words, there may be a pause in raising interest rates here in the U.S.?

That said, what never ceases to amaze me is how technically disciplined the markets can be. If you look at the major averages over the past two weeks you will see that all of these key indices held their August 2015 lows. Especially the Dow (chart) and the Nasdaq (chart) which traded down almost to the nickel to their respective August lows. In my previous blog I cited the Federal Reserve and their policy shift to raising interest rates and the fact that now markets and equities can be assessed on their own merits versus what the central banks may or may not do. Well Friday’s Bank of Japan’s move is a reminder that central banks around the world are ready and capable of intervening at any point in time. Which brings me back to this, how in the world can you confidently have a short thesis in these markets? In my opinion, this model is simply too risky when you have monetary policies that can turn on a dime.

So what’s an investor or trader to do? One thing that stands out to me is throughout all of the noise and chatter is that the technicals continue to perform with the utmost efficiency. Whether markets or equities are overbought or oversold vis-à-vis the relative strength index (RSI) , or support lines are met and hold. No one can deny how disciplined and efficient technical analysis can be.

Good luck to all 🙂

~George

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

Happy New Year!

Posted on by George Mahfouz

2015 essentially proved to be a flat to down year for stocks taking some investors and traders by surprise. The Dow Jones Industrial Average (chart) closed the year down 2.2%, the S&P 500 (chart) minus dividends closed down just under 1%, the Nasdaq (chart) closed up 5.73% and the small-cap Russell 2000 (chart) closed the year down 5.71%. What’s more is how crude oil (chart) fared in 2015 declining more than 30% which also had weighed heavily on the aforementioned indices.

Looking ahead to this year, stocks find themselves in a place where they haven’t been in quite sometime and that is a rising interest rate environment. Historically speaking, equities tend to be under pressure at the beginning of and throughout a rate hike cycle with the exception of cyclical stocks and certain commodities. However this time may be different. In the past when the Federal Reserve begins to raise interest rates it is usually to fend off inflation and/or to cool off the economy when it becomes too hot. From my view and from the data flow, this is not the environment we find ourselves in today. So I do not expect that the Federal Reserve would raise rates aggressively or too quickly. With that said, the markets might not trade the way they would if we were in an inflationary environment with rising interest rates. Nonetheless, I do think that more volatility will come into stocks in 2016 and it will become more of a stock pickers market.

Furthermore, the technical shape of the market appears to be setting up for more downward movement as the key indexes have breached or are about to breach their respective 200-day moving averages. However, it would take days of trading below their 200-day to set off an alarm at least from a technical perspective. Let’s see how the first week of trading in the new year plays out before making any sort of definitive technical opinion.

Both Paula and I sincerely wish everyone the healthiest, happiest, safest and most prosperus New Year yet 🙂

~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