Russell 2000

Super week for stocks!

Posted on by George Mahfouz

Stocks rallied for the second straight week as the key indices have now just about recaptured all of their losses incurred in August. The Dow Jones Industrial Average (chart) had one of its best weekly showings of the year gaining over 3%, the Nasdaq (chart) closed the week up 1.7%, the S&P 500 (chart) +1.98% and the small-cap Russell 2000 (chart) finished the week up 2.37%. Over the past couple of years, time and time again whenever equities as a whole have had a five percent pullback or so, such as what we experienced in August, a significant rally ensues and the bull market seemingly resumes. They say markets are forward looking indicators, well we must be in store for quite the year-end closeout, or are we?

This upcoming week the FOMC meeting will take center stage. The debate is on as to whether or not the Fed will start reducing its bond and mortgage back securities purchases and what effect this could have on the markets. My feelings are that there is still enough tepid economic data coming in for the Fed not to begin to taper. However, there are plenty of pundits out there that argue that the economy is beginning to show pockets of strength which could give the Fed the green light to begin with a small reduction with their future purchases. Either way, the technicals are now on their way to overbought territory, and interest rates are continuing to rise with the 10-year treasury note (chart) closing in on 3%. This could be a one-two punch to once again slow down and even potentially reverse this most recent rally.

That said, if you are a technical trader, this is an almost perfect environment to trade in. Support levels are continuing to be honored as well as resistance marks. We now find ourselves butting up against the upper end of the trading range in the S&P 500 (chart) and we could very well be headed back to support levels which in this case would be the 1630 zone on the S&P (chart). If the markets embrace the Fed’s action or lack thereof, a breakout above the all time high of 1709 of this key index could very well be in the cards.

Good luck to all and have a great week 🙂

~George

 

Chalk one up for the bears…

Posted on by George Mahfouz

The month of August proved to be the most challenging for the bulls in over a year. For the month, the Dow Jones Industrial Average (chart) closed down 4.45%, the tech-heavy Nasdaq (chart) -1.01%, the S&P 500 (chart) -3.13%, and the small-cap Russell 2000 (chart) finished the month lower by 3.29%. There are many factors that one can point the finger to as to why equities retraced last month, however, let’s keep in mind that on the year, these key indices are still up double digits with the Nasdaq (chart) and Russell 2000 (chart) leading the way up nearly 20%.

In my last blog, I questioned whether or not the weakness in August was a mere pause in this incessant bull run, or a preview of things to come? I think we will most certainly get this answer here in September and as early as this upcoming week. Between the crisis in Syria and what the ramifications could be after the possible airstrikes, to a slew of economic reports which culminates on Friday with the August employment report. Friday’s jobs report is expected to be the determining factor as to if and how much the Fed will begin to reduce its bond purchases. The Fed taper seemingly is all we have heard about since the beginning of summer and is part of the reason for the recent increase in volatility. Traders really don’t know what to expect once quantitative easing begins. For years the markets have had the back stop of the Federal Reserve and from central banks around the world. Personally, I think that once the Fed begins to pullback its bond purchases, we will then begin to see a more realistic market environment. This would be an environment that investors and traders can finally gauge their actions from true economic and corporate earnings performances, rather than what the Fed will or will not do. With that said, I expect volatility to continue to increase with a more normal ebb and flow of asset prices.

Technically speaking, the Dow Jones Industrial Average (chart), the S&P 500 (chart) and the Russell 2000 (chart) are all now trading below their 50-day moving averages  which is something I am paying close attention to now. In the coming days if the Nasdaq (chart)  joins in and begins trading below its 50-day, we could be in for very choppy trading and another leg down in September. Good luck to all.

Happy Labor Day 🙂

~George

A pause or a preview?

Posted on by George Mahfouz

The key indices had one of their worst performing weeks of the year. For the week, the Dow Jones Industrial Average (chart) fell 2.23%, the Nasdaq (chart) pulled back 1.57%, the S&P 500 (chart) -2.1% and the small-cap Russell 2000 (chart) closed the week down 2.3%. It’s important to note that other than the Dow Jones Industrial Average (chart), the aforementioned other key indexes remained at or above their 50-day moving averages. Stocks reacted to rising interest rates and weak retail sales reported by several retailers including Walmart (NYSE: WMT) which missed on thier earnings as well as providing a somber outlook. Furthermore, bellwether Cisco Systems (NasdaqGS: CSCO) also issued cautious forward guidance during their post earnings release conference call on Wednesday.

So the question now becomes is this a blip on the radar, or a preview of things to come? All year long stocks have been propped up by the most accommodative Fed in history. I also have been writing about the need for top-line growth out of corporate America in order for this bull market to continue. To that point, I have been simply wrong from the standpoint that central banks from around the world continue to pour liquidity into the system and continue to keep interest at or near zero. This policy has taken the emphasis off of how well corporate earnings are actually doing. As Q2 earnings reporting season begins to wind down, there is growing evidence of tepid growth at best, especially in the retail space. Furthermore, the companies that have beat estimates have done so by running a tighter ship and getting more productivity from their current workforce.

Personally, I would like to see how this corrective action plays out over the next few weeks before I am comfortable deploying any long or short strategies in the marketplace. To that end, let’s not forget we are smack in the middle of the dog days of summer, and with most money managers at the beach, volume tends to be very light. Good luck to all.

Have a great weekend 🙂

~George

Record breaking July!

Posted on by George Mahfouz

The month of July served up all time highs as Q2 earnings reporting season begins to wind down. For the month, the Dow Jones Industrial Average (chart) closed up 3.50%, the tech-heavy Nasdaq (chart) gained a whopping 6.8%, the S&P 500 (chart) +4.38% and the small-cap Russell 2000 (chart) closed the month up 5.6%. The rally in stocks continue thanks to favorable corporate earnings for the most part, and the Federal Reserve keeping its commitment to do whatever it takes until the economy can stand on its own two feet. Yesterday, after the Federal Reserve’s 2-day policy meeting ended, the central bank reiterated that it would continue its $85 billion per month bond buying program and keep interest rates near zero to help support and strengthen the economy.

That said, August begins with quite the test as all eyes will be on tomorrow’s  jobs report. The July unemployment report should be the most scrutinized report of the year as the Federal Reserve has been on the record recently signaling as to when they may start pulling back on its monthly bond purchases. A stronger than expected report may compel the Fed to begin tapering as early as September. However, if job growth continues to be modest, then I think its safe to say the accommodative policies of the Fed will continue into the foreseeable future. So you may ask what does this all mean to the market? This may become the case where good news in the labor market may be bad news for stocks. I know it seems counterintuitive, however, just the notion in late May that the Fed was considering tapering sooner than later sent the markets down five percent in a matter of a couple of weeks. I think everyone from the hedge fund community to mutual funds to institutional investors and even the individual retail investor have been so reliant on this accommodative Fed, that once the tapering actually begins, we may just see the stock market correction the bears have been anticipating all year long.

Technically speaking, although the markets are seemingly overbought, the key indices are not at extreme overbought conditions, just yet. Let’s take a look at the relative strength index (RSI) on the Dow Jones Industrial Average (chart), the Nasdaq (chart), the S&P 500 (chart) and the Russell 2000 (chart). As you can see, these indexes are trading below the 70 value level which is the level most market technicians consider an extreme level. I personally consider the 75-80 value level as extreme, especially in today’s market environment. That said, it appears there has been some consolidation going on over the past couple of weeks with the aforementioned indexes which have been trading in a pretty tight range.  Just maybe tomorrow’s unemployment report will be the catalyst for stocks to breakout of its recent trading range and begin a new trend. I view a breakdown of the 1650 zone in the S&P 500 (chart) as bearish. However, should the S&P 500 (chart) break and close above 1700 in a meaningful way, we may just see the extreme overbought conditions come into the marketplace as mentioned above. Good luck to all and I wish you all a very profitable month.

All the best 🙂

~George

Back on track…

Posted on by George Mahfouz

Despite some market jitters and a pullback in June, stocks are right back in bull mode with the Dow and S&P closing at new highs. For the week, the Dow Jones Industrial Average (chart) closed up 2.17%, the S&P 500 (chart) +2.96%, the Nasdaq (chart) +3.47% and the small-cap Russell 2000 (chart) closed the week out up 3.10% also closing at an all time high. These impressive weekly gains were spurred on by Ben Bernanke’s reassurance that the fed’s easy monetary policies will continue for the foreseeable future.

Once again the mettle of the market will be tested this week with Q2 earnings reporting season kicking into high gear. Here are some of the companies that will report their second quarter results: Citigroup (NYSE: C), Coca-Cola (NYSE: KO), Goldman Sachs (NYSE: GS), Johnson & Johnson (NYSE: JNJ), The Charles Schwab Corporation (NYSE: SCHW), Yahoo (NasdaqGS: YHOO), Bank of America (NYSE: BAC), American Express (NYSE: AXP) and Ebay (NasdaqGS: EBAY), International Business Machines, (NYSE: IBM), Intel (NasdaqGS: INTC), United Health (NYSE: UNH), Google (NasdaqGS: GOOG) Blackrock (NYSE: BLK), Microsoft (NasdaqGS: MSFT) and Morgan Stanley (NYSE: MS).

So as you can see, next week’s earnings reports will take center stage and should guide our markets as we continue to go through the summer months. I look for volatility to increase which is typical with earnings reporting season. Good luck to all.

Have a great week 🙂

~George

Despite a modest pullback in June, the major averages continue to post double digit gains on the year…

Posted on by George Mahfouz

In month of June, the key indices witnessed a spike in volatility and their first monthly drop in 2013, however, stocks in the second quarter once again posted impressive gains. In Q2, the Dow Jones Industrial Average (chart) finished up 2.27%, the Nasdaq (chart) +4.15%, the S&P 500 (chart) +2.36% and the small-cap Russell 2000 (chart) closed the quarter up 2.73%. So far this year these averages are up an eye-popping 13.78%, 12.71%, 12.63% and 15.09% respectively.

As I look back over the past month or so volatility kicked into high gear as the Fed continued to signal that its bond purchases would relent as early as the fourth quarter of this year. Couple that with Japan’s Nikkei index dramatically declining over 20% in less than a month from its recent high, and the gold market (chart) getting taken out to the woodshed with gold having its worst quarter on record, losing over 24% on the quarter. It’s no wonder the key indices retraced in June. In fact, I am surprised that our averages did not decline any further considering all of the facts.

So what now you may ask? How does the second half of the year portend to be? Here is the catch-22. As economic numbers continue to improve, this will give the Fed more reason to begin to lighten up on their bond purchases, hence more market volatility. However, if the economy continue to grow anemically, this will give the Fed the green light to keep stimulating. What’s wrong with this picture though? In my opinion, at some point in time our economy will have to stand on its own two feet and the top line of corporate America will have to show meaningful growth in order for this bull market to continue. We won’t have to wait very long to understand the health and growth prospects of corporate America as Q2 earnings reporting season kicks into gear here in July. That said, as a trader you relish in the opportunities that earnings season provides both on the long and short side. However, make sure to abide by your trading plans, disciplines and always consider using protective stops as part of your plan. Earnings reporting season typically adds to volatility and larger than expected price movements. I bid you good luck.

All the best 🙂

~George

Technically speaking…

Posted on by George Mahfouz

Stocks finished lower for the week as volatility continued to rise. For the week, the  Dow Jones Industrial Average (chart) closed down 1.17%, the Nasdaq (chart) -1.32%, the S&P 500 (chart) -1.01% and the small-cap Russell 2000 (chart) closed the week lower by 0.63%. Is this bull market beginning to show signs of fatigue or is this just a typical pre-summer pullback? Let’s take a look at the technical picture of these key indices and see what’s going on there.

Market technicians use a multitude of indicators to discern potential support or resistance levels. My preference has always been to keep things as simple as possible when analyzing charts of stocks or indices. The two indicators I pay the closet attention to is the Relative Strength Index also know as the RSI and the moving averages. Out of dozens of technical indicators that are available, you may ask why do I prefer these particular indicators? The answer simply is that high profile market technicians,  computerized trading models and certain institutional investors utilize them.  Time and time again when I see that Relative Strength Index (RSI) is indicating an overbought or oversold condition, the majority of the time the asset or index reverts to the mean. Same rings true with the moving averages, whenever a stock or index bumps up against or comes down to its moving average, typically the stock or index finds support or resistance.

Let’s break this down in more detail. Pertaining to the (RSI), 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. As of right now the aforementioned indices are hovering around the 50 value level which is not indicating an extreme condition either way. Looking at the moving averages these indices remain above their 50-day moving average and as you can see with the Dow Jones Industrial Average (chart) and S&P 500 (chart), these indexes have bounced off their 50-day moving averages/support lines three times over the past week or so which clearly demonstrates the potential of the power and precision of this particular technical indicator.

So technically speaking, I see nothing that would indicate an extreme condition of these indexes and as long as their are no major surprises out of the FOMC meeting next week, we should see smooth sailing heading into the summer. Good luck to all.

Have a great weekend 🙂

~George

Is risk back off?

Posted on by George Mahfouz

On the last trading day of May, the Dow Jones Industrial Average (chart) sold off by 208.96 points, the Nasdaq (chart) -35.38, the S&P 500 (chart) -23.67 and the small-cap Russell 2000 (chart) finished the day lower by 10.28 points. Is this a possible prelude for the month of June? After the six-month+ run that stocks have been on, one has to wonder if these markets are poised to correct?

As I wrote in mid-May, I expected volatility to begin to increase, and sure enough the VIX (chart) also known as the fear gauge spiked 27.5% over the past two weeks. Ever since the Fed began mapping out an exit strategy, the market chatter has steadily increased as to how stocks and bonds would react. Furthermore, since its May policy meeting, the Fed has had a difficult time communicating its position as to how it will move forward. I know that some type of jaw boning needs to occur in order to prepare the markets for the beginning of monetary easing. However, a policy statement at the beginning of May indicated that the Fed’s next move could either be up or down? Confusing isn’t it? So it’s no wonder some sort of fear has begun to creep into these markets.

That said, this has become such an unprecedented market environment, I don’t know what to think right now. Isn’t the job market, corporate earnings, and top-line growth supposed to drive stocks? What I and many on the street are concerned with is the day the Fed decides to begin its wind down, how will equities react? Next week I will be paying close attention to the plethora of economic reports that will be issued which includes the PMI and ISM manufacturing indexes, the Beige Book and of course the all important Jobs report which will be issued on Friday before the market open, just to name a few. If the economy can begin to demonstrate meaningful strength, then any type of pullback or correction will most likely be met with wide support. However, if economic numbers stay weak, then we could very well be in for a lot more volatility this summer. Good luck to all.

Have a great weekend 🙂

~George

En route to 20%? Wait a minute…

Posted on by George Mahfouz

As stocks and key indices continue to break records, the four major averages are now approaching 20% gains year to date. So far this year, the Dow Jones Industrial Average (chart) is up a whopping 15.37%, the Nasdaq (chart) +13.81%, the S&P 500 (chart) +14.55% and the small-cap Russell 2000 (chart) is up year-to-date 14.81%. But hold the phone! A report issued after the close on Friday just might be what the bears have been looking for and what could be a catalyst to a pause or pullback to these red hot markets.

On Friday after the close, an article came out in the Wall Street Journal citing that the Federal Reserve has begun to map out a strategy for winding down its $85 billion-a-month bond buying program. This super aggressive part of the ongoing stimulus program has played an enormous role in the lift in equities and the economy over the past year or so. Although the article cited a variety of options that the Fed is outlining, there are some Fed officials calling for the wind-down to begin as early as this summer. I will be very interested to see how the markets react to the report this upcoming trading week. I do not think anyone expects that the Fed will be overly aggressive with any adjustment it makes, but nonetheless, stocks have been a huge beneficiary of this extraordinary component of the stimulus program. I wouldn’t be surprised if the markets will take this latest cue and begin to exhibit an increase in volatiltiy. Besides, and as everybody knows, equities have been long overdue for a pause at the very least, and even more so a healthy pullback.

As I look to the internals of the market, this unprecedented run stocks have had so far this year has been on lighter volume, but this also has been the case since the bull market began back in 2009. Whatever the case is, without question these markets have been and are over extended to say the least. Let’s see if the Fed’s latest statement shakes the trees out a bit. I am considering initiating a short bias theme in certain indexes but will have the utmost discipline in protecting any positions by have very tight stops. Seemingly, almost everyone who has attempted a short strategy this year most likely endured a great amount of grief, however, at some point and time the bears should have their day in the sun. I am not suggesting that anyone should short this market or any market for that matter, short selling markets of any kind involves a significant degree of risk and is not for the feint of heart. That said, and as always, make sure to consult with a certified financial advisor of your choice when considering any investment strategy. Have a great week 🙂

~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