Russell 2000

Are Stocks Poised To Breakout?

Posted on by George Mahfouz

After an early November sell-off, the major averages could be on the verge of a breakout, at least from a technical point of view. The noticeable dip in equities that occurred recently was met with strong support and now stocks have rallied up to key resistance levels. The Dow Jones Industrial Average (chart) closed the month of November at 17720, the Nasdaq (chart) closed at 5109, the S&P 500 (chart) closed at 2075 and the small-cap Russell 2000 (chart) closed the month of November at 1198. As you can see by their charts the three top indices have resistance levels of 18,000, 5175 and 2125 respectively while the small-cap Russell 2000 (chart) is seemingly on the verge of breaking out. That said, it takes more than a day or two trading above a resistance level with strong volume to confirm a breakout. What could be in favor for a breakout with all of the aforementioned indexes is the seasonality of the markets a.k.a. the Santa Clause rally. This could very well be the catalyst for a year-end rally.

What could get in the way of a potential Santa Clause rally? One example could be if the technical resistance line(s) holds true to form and the key indices cannot breakout with conviction above these marks . There is also the risk of China’s market continuing to abate as regulators are cracking down on trading practices of major Chinese brokerage firms. The China weakness can spill over here to our shores even if it is only a short-term consequence. Of course there is always a geo-political risk that could weigh in on market sentiment and behavior. And last but not least, the Good Ole Federal Reserve and whether or not they would implement their first rate hike in almost a decade when they meet later this month.

That said and notwithstanding any of these risks, we have seen stocks incredibly resilient during this multi-year bull run and I would not be surprised if we indeed breakout and experience a year-end rally that could challenge the all time highs. Good luck to all 🙂

~George

Is It A Looming Rate Hike, Or Something Else?

Posted on by George Mahfouz

After posting blistering gains in the month of October, stocks took it on the chin last week and it’s technically looking like more short-term downside could be in the cards. For the week, the Dow Jones Industrial Average (chart) lost 665 points, the Nasdaq (chart) retraced 219 points or 4.3%, the S&P 500 (chart) -76 points and the small-cap Russell 2000 (chart) closed lower on the week by 53 points or 4.4%.

Seemingly, the start of the selling pressure accelerated when the October labor report came out surprisingly strong. This report was released on November 6th. One could say that this is the main reason stocks have been under pressure. Pundits are now calling with almost certainty that the Federal Reserve has the green light to raise interest rates at their next meeting in December. Couple this will commodity prices continuing to fall, in particular oil, which is down recently almost 10% and you can understand why the markets would be under pressure. Or could it be the simple fact that October saw almost 10% gains across the board and the key indices were overdue for a pullback. I’d like to add to the mix that the latest round of economic numbers could also be weighing in on investor sentiment. This is evidenced by a weaker than expected retail sales number and weak retail earnings reports issued last week along with a very weak Producer Price Index. Sum all of this up and it’s no wonder the aforementioned indexes closed lower by almost five percent last week. From a technical perspective the key indexes have now breached their respective 200-day moving averages and if you are bullish, you would want to see the markets recapture this key technical support line and return to the uptrend that was intact throughout the month of October.

As the Thanksgiving Day holiday fast approaches, both Paula and I wish everyone a very safe, healthy and Happy Thanksgiving 🙂

~George

Strong Month For Stocks!

Posted on by George Mahfouz

Much to my surprise and to the surprise of many investors and traders alike, the major averages in October posted eye-popping results. For the month, the Dow Jones Industrial Average (chart) gained 8.7%, the tech-f0cused Nasdaq (chart) gained almost 10%, the S&P 500 (chart) notched an 8.3% gain and the small-cap Russell 2000 (chart) closed the month out up 5.55%. Yes almost double digit gains for the Dow, Nasdaq and the S&P 500. Now wait a minute, I thought the month of October is supposed to be one of the weakest months of the year for equities. I think in large part earnings reporting season has been a pleasant surprise to most investors and a continuing subdued Federal Reserve is responsible for the most recent gains and confidence in stocks. That said, I do think that this latest market run has been a bit too much too fast.

A quick look at the Relative Strength Index of the aforementioned indexes might also confirm my belief. The relative strength index is also referred to as the RSI. This particular indicator is one of the most watched technical indicators by seasoned traders and investors alike. The RSI compares the size of moves of gains and losses in a given period of time to highlight whether a stock or index is overbought or oversold. According to the RSI principles, the 70 value level or greater is considered an overbought condition and the 30 value level or lower is considered oversold. And as you can see with the Dow Jones Industrial Average (chart), the Nasdaq (chart) and the S&P 500 (chart), all three indexes recently hit or breached their respective 70-value line and reversed course on Friday. Now that does not mean that these indices could not break back through the 70 value level and continue onto higher levels and remain overbought for an extended period of time. What I am saying is that historically and from a technical point of view, the relative strength index has been quite reliable when markets overshoot to the up or down side.

We are now in the final two months of the trading year and let’s see how the markets react to this initial pullback we saw on Friday and whether or not this is the beginning of a slight correction to this extraordinary market run we experienced last month.

Good luck to all 🙂

~George

Staying True To Form…

Posted on by George Mahfouz

In late September stocks appeared to be heading to new 52 week and multi-year lows. But as this market has demonstrated its resilience during this six year bull run, the four major averages found support near its previous lows in late August and have bounced nearly 10%. This most recent market action have yet again muzzled the bear pundits and revived the bulls hopes for a possible year-end rally. For the week the Dow Jones Industrial Average (chart) closed modestly higher up 131.48 points, the Nasdaq (chart) had a weekly gain of 56.22 points, the S&P 500 (chart) finished up 18.22 points and the small-cap Russell 2000 (chart) bucked the uptrend falling slightly by 3.05 points.

So could there be a year-end rally in the cards? I think the answer to that question will come forward as we are now kicking into high gear with Q3 earnings reporting season. Already this past week we heard from the likes of JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS) and international conglomerate General Electric (NYSE: GE) who all provided results investors could cheer about. Each one of these companies notched impressive gains on the week not only helping the key indices, but also instilling confidence with investors. However, and as we all know, earnings reporting season can be volatile and we are at just at the starting gate.

Next week we will get quarterly results from technology giant Broadcom (NasdaqGS:BRCM), oil and gas equipment services behemoth Halliburton (NYSE: HAL), Bank of New York Mellon (NYSE: BK), Chipotle Mexican Grill (NYSE: CMG), Yahoo (NasdaqGS: YHOO), biotech giant Biogen (NasdaqGS: BIIB), Coca-Cola Co. (NYSE: KO), General Motors (NYSE: GM), Las Vegas Sands Corp. (NYSE: LVS), Amazon.com Inc. (NasdaqGS: AMZN), E*Trade Financial Corp. (NasdaqGS: ETFC), basic materials giant Freeport-McMoRan Inc. (NYSE: FCX), Microsoft (NasdaqGS: MSFT) and American Airlines Group Inc. (NasdaqGS: AAL) just to name a few.

These are only a handful of companies scheduled to report next week with hundreds more to follow in the coming weeks. That said, both Paula and I will continue to remain patient and wait until after earnings reporting season before we consider any new market strategies.

Good luck to all 🙂

~George

Rough Quarter For Stocks…

Posted on by George Mahfouz

Although the markets rallied yesterday, the major averages in Q3 closed lower for the second straight month. In fact, year to date the Dow Jones Industrial Average (chart) is down 8.6%, the Nasdaq (chart) is off by 2.5%, the S&P 500 (chart) is lower by 6.8% and the small-cap Russell 2000 (chart) year to date is down 8.6%. So the bulls are asking what gives? My question is more of what has taken so long? The U.S. markets have not seen any kind of meaningful or long lasting correction in six years. This is not a surprise and if anything should be embraced. Stocks have been driven by the Federal Reserve policies ever since the introduction of the first quantitative easing mandate. How easy has this market been? All any investor or fund manager really had to do over the past 6 years is buy and hold with no need for concern. I think it’s safe to say the landscape is changing and rightfully so. There are many investors out there that missed this stunning bull run we have been on simply because it was hard to agree with the valuations that most of the market has enjoyed during the Federal Reserve buyback program and low interest rate stance. Top-line growth has really not been the catalyst that has driven stocks during this incessant bull market. However, when you are in a low to negative interest rate environment there really isn’t any other option to place funds. The question now is are we heading towards or already in a normalized market environment? Meaning will equities now begin to trade on their own merits? To me it certainly feels like the markets are setting up this way.

We won’t have to wait very long because third quarter earnings reporting season is just ahead. Without question I expect this upcoming earnings reporting season will be scrutinized like no other in recent memory. I believe gone are the days that investors will give any company a pass should their results come in under street estimates or even in-line with the street. For me personally there is too much volatility in the marketplace right now and my preference is to go to the sidelines until after Q3 earnings reporting season is over. I will then evaluate the landscape from a fundamental and technical point of view. Speaking of the technical shape of the market, this too of a concern of mine. All of the key indices are in a significant down trend trading well below their respective 200-day moving averages. Yes theses indexes are finding a bit of support right here, but if earnings reporting season doesn’t add up, new 52 week or even multi-year lows could be in the cards? My point here is that with the way the markets look and feel, it is probably best to be a bit more conservative until after we see the health and growth rate of corporate America. Good luck to all 🙂

~George

Stocks Skittish Before The Fed Meeting…

Posted on by George Mahfouz

Stocks have become hesitant as to which direction to head into with all eyes now on whether the Federal Reserve will raise interest rates this week for the first time in almost a decade. The Dow Jones Industrial Average (chart) started the week down 62.13, the Nasdaq Composite (chart) closed Monday’s session out down 16.58, the S&P 500 (chart) fell 8 points and the small-cap Russell 2000 (chart) closed modest lower by 4.3 points.

As investors and traders await the decision from the Federal Reserve as to whether or not a rate increase will occur, I think the markets are putting too much emphasis on the initial hike, regardless if it’s announced after the conclusion of their two-day meeting this week. To me what’s more is how will the Federal Reserve respond over the coming months and quarters ahead? Shouldn’t we be more attuned to their behavior pattern after the first hike? Or whether or not they will raise rates at an accelerated rate? To me this is the bigger question. Of course a quarter point rate hike or even a 50 basis point hike is in the cards and is inevitable at some point in time, whether it’s this week or at the Federal Reserve’s future meetings. My focus and attention will be on how they treat the interest rate environment after the first rate hike actually occurs. Based on the temperament and demeanor of Janet Yellen, I would expect a continuing cautious protocol from our Fed Chair and I would think that neither she or the Fed would not be inclined to raise rates too fast. I would think the economic data would dictate the velocity of future rate hikes and even if the data becomes robust, the Federal Reserve would want to see multiple quarters of meaningful expansion before we get back to normalized rates.

That said, I do think that the markets and investors are going to need to get used to increased volatility and market swings similar to what we have been experiencing over the past few months. I believe gone are the days of low vol and indeed investors are going to need to pay attention now more than ever to the true growth rates of companies, especially on the top-line. You see in a rising interest rate environment companies can no longer grow their bottom line alone while maintaining high valuations. Real growth needs to come forward in the form actual sales expansion in addition to productivity in order for companies to maintain elevated P/E multiples. Bottom line, you better know the companies you choose to invest in because the free lunch so to speak that the markets, investors and traders have enjoyed over the past several years may come to a close in the near future…

Good luck to all 🙂

~George

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

 

Stocks Go On A Bumpy Ride…

Posted on by George Mahfouz

The stock market ended the week eking out slight gains. For the week, the Dow Jones Industrial Average (chart) closed higher by 0.6%, the Nasdaq (chart) barely closed in the green on the week, the S&P 500 (chart) closed up 0.7% and the small-cap Russell 2000 (chart) finished the week up one half of one percent. I guess this could be viewed as a big win for the key indices considering how light crude oil (chart) has plummeted recently which directly correlates to the energy industry as a whole. Energy stocks have also gotten crushed along with oil which is why I think it’s rather impressive that aforementioned indexes were able to end the week in positive territory. However, volatility (chart) is continuing to spike and the 200-day moving average on the S&P 500 (chart) continues to get challenged. Some pundits believe that it’s only a matter of time that the 200-day on the S&P (chart) will not hold much longer, however, if you look back, no one can deny how this technical metric has been a pillar of support for this most watched index.

So what does an investor or trader do in this historically weak month for stocks and with volatility spiking now weekly? For me personally, I am not as active in the markets due the volatility spikes and typically lower volumes associated with the summer month of August. I prefer to spend my time in research identifying opportunities in the marketplace. For instance, watching the oil markets unravel the way that they have, without question opportunities are forthcoming in this space. The majority of individual energy stocks do indeed trade with the price of oil (chart) and to predict when the price of oil will stabilize is almost impossible. However, at some point in time oil will indeed stabilize and a plethora of opportunity will surface. If you do not want to take the risk on individual names, you can always consider the most popular ETF that tracks the energy space (symbol: XLE). This equity energy fund has an approximate $11.69 billion in net assets with holdings in some of the largest and most respected energy companies in the world. Of course and as I always recommend, it is always best practice to consult with a certified financial planner(s) that you feel comfortable and confident with before making any investment decisions. Good luck to all 🙂

~George

Despite A Pop In Volatility, Bull Market Remains Intact!

Posted on by George Mahfouz

In the month of July, the major averages continued to demonstrate what a bull market looks like despite an increase in volatility $VIX (chart )and global macro concerns. For the month, the Dow Jones Industrial Average (chart) closed up a modest 0.40%, the Nasdaq (chart) gained 2.8% in July, the S&P 500 (chart) advanced 2.0% and the small-cap Russell 2000 (chart) actually ticked down on the month giving up 1.28%. One interesting note and if you look at the charts of the above mentioned indices, in the month of July each of these indexes breached their 200-day moving average and three of the four breached this support line twice only to rebound sharply and keep the technical makeup of the markets intact. Without question and throughout this six year long bull run, the technicals of stocks and indexes have done their job and has acted as technicians would expect.

Fast forward to today August 1st and if you have been on Wall Street long enough, yes we are now entering the dog days of summer. As Q2 earnings reporting season works its way through and begins to wind down, I would expect volatility also begin to abate as it has towards the latter part of this past week. Without question these markets could still react to China’s extreme volatility as of late or if there is a big surprise in next week’s job’s report, however, without any big surprise here or overseas, I think this becomes a stock-pickers market as well as a technically traded market paying attention to trend lines and overbought and oversold conditions. This could also be the perfect environment to sell put option premium on your most favorite stocks in order to generate some additional income. One other option which may be a very valid one, and that is turn off your screens and head to the beach until after Labor Day :-).

Whatever you choose to do as we enter the “dogs days of summer” it is always best practice to consult with a certified financial planner(s) before making any investment decisions or changes to your portfolio. Good luck to all 🙂

~George

It’s All About Greece…

Posted on by George Mahfouz

The Greece Crisis is at the forefront of the markets yet again. Greece closed its banks and stock market on Monday in an attempt to avoid on run on their financial institutions. The heightened state of Greece sent our markets into a tailspin on Monday, however the U.S. stock market did find it’s footing yesterday managing to eek out a small gain. For the month of June, the Dow Jones Industrial Average (chart) closed down 391.18 points at 17,691.51, the Nasdaq (chart) finished the month lower by 83.16 points at 4987.00, the S&P 500 (chart) -44.29 points at 2063.11 and the small-cap Russell 2000 (chart) was one of the only major averages that finished the month of June positive closing up 7.42 points on the month at 1253.95.

So what’s in store for the month of July you may ask? One word, Volatility! Since the realization that Greece is going to miss its $1.7 billion dollar debt payment it owes to the International Monetary Fund and that Greece may no longer be a part of the European Union, volatility slammed the global markets. The $VIX (chart) which trades on the Chicago Board Options Exchange is the Volatility Index. The $VIX indicates the market’s expectation of future volatility, 30 days to be exact, spiked as high as 41% since Monday. We have not seen this type of vol for months and I don’t expect it to let up anytime soon.

Although Greece continues to grab the headlines, there are other concerns that contagion can spread to other debt ridden EU countries such as Spain and Portugal. Even Puerto Rico has it’s own debt issues that are of increasing concern. I do expect that there will be a resolution of some sort to this latest crisis, but I also do believe volatility will stick around for a bit.

Another catalyst that could create additional volatility is the upcoming Q2 earnings reporting season. U.S. companies will begin to report their results after the 4th of July holiday and in earnest the week thereafter. So you can see why I believe volatility could be increasing over the next several weeks. As a trader, this is what you have been waiting on and if you are a long term investor, you have been through this before.

Both Paula and I wish everyone a very safe and Happy 4th of July Holiday 🙂

~George