S&P 500

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

Now That’s What I Call A Bounce!

Posted on by George Mahfouz

After such a torrid bull run in 2013, where the the four major averages gained over 25%, to no great surprise, these same indexes experienced more than a 5% pullback in January and early February. However, over the past couple of weeks and true to form, these indexes not only bounced off of key technical support zones, but they also took back their 50-day moving averages. For the week, the Dow Jones Industrial Average (chart) finished up 2.28%, the Nasdaq (chart) had a gain of 2.86%, the S&P 500 (chart) +2.32% and the small-cap Russell 2000 (chart) closed the week up 2.92%. The markets responded with a roar as the new Fed chairwomen Janet Yellen, in her first public appearance at the helm of the Fed, reiterated her commitment to model after the Bernanke era monetary policies. Stocks were already recovering from the January correction but accelerated their gains as she spoke to Congress this past Tuesday. All expectations now are that stocks will remain buoyed by the continuing asset backed purchases despite the modest tapering that is now in effect.

In my previous blog I expressed concern over the technical breakdown of the markets and that the 50-day moving averages of the key indices had been breached. Furthermore, I thought there was a possibility of the 200-day being the next stop. However, I did also indicate that if the markets were able to rebound and take back their 50-day and remain above that mark, that would be a positive. This is where we find ourselves now. All of the aforementioned key indexes have traded and closed above this key technical metric. The question now becomes whether or not this slingshot bounce and break above the 50-day is sustainable? Q4 earnings reporting season really didn’t say too much about the growth of corporate America, which overall was a mixed bag at best for the majority of the sectors. Couple this with economic signs of weakness as retail sales growth still remains flatlined, and I think we will continue to experience choppy waters for stocks, and I would be surprised if we began making new high after new high like last year. That said, liquidity for stocks is seemingly plentiful and we are still in a strong seasonality period for equities, so I also wouldn’t be surprised if we stabilized above the 50-day and consolidated for an extended period of time. Unless of course there is an unexpected negative geopolitical or global macro event that creeps back into the mix, then all bets are off. I will continue to track the technicals to gauge entry and exit points while using protective stops along the way. Good luck to all and both Paula and I wish everyone a very safe and happy Presidents’ Day holiday. Please note the markets are closed on Monday in recognition of Presidents’ Day.

Have a great weekend 🙂

~George

A Mixed Bag…

Posted on by George Mahfouz

At the height of Q4 earnings reporting season, results from corporate America have been conflicted, so far. Let’s start with everyone’s favorite, Apple (NasdaqGM: AAPL). Despite sales of its iPhone hitting records during the holiday season, those sales were shy of what the street was expecting by three million units. Furthermore, during the conference call after its earnings release on Monday, management projected a softer outlook for the upcoming quarter amid growing competition in the smartphone and tablet marketplace. This was enough to send Apple’s shares lower by over 10% this past week. In fact, the majority of the retailers have reported very disappointing results this earnings reporting season with the widely followed and traded retail SPDR S&P Retail ETF (NYSE Arca: XRT) (chart) down almost 10% for the month of January.

Now let’s take a look at the results of the four key indices so far this year. For the month of January, the Dow Jones Industrial Average (chart) is down 5.3%, the tech-heavy Nasdaq (chart) is off by 1.7%, the S&P 500 (chart) is lower by 3.6% and the small-cap Russell 2000 (chart) finished the month down by 2.8%. In my January 1st blog, I eluded to expecting a 5%, 10% or even a 15% correction in 2014, and we could very well be in this corrective phase as we speak. The question now to investors and traders alike is how steep could this current pullback become? Let’s not forget we are coming off of a year in which these key indexes individually gained well over 25%, with the Nasdaq leading the way gaining a whopping 38% in 2013. What I try to do is tune out all of the noise that comes out of the financial cable channels and media and focus on seasonal patterns and the technicals of the market. Technically speaking, the markets are not yet in an extreme oversold condition according to the RSI principles. Remember the Relative Strength Index a.k.a. the RSI is one of my favorite technical indicators where overbought and oversold conditions are exhibited depending on certain value levels. In this case and according to the RSI principle, the 30 value level and below is considered oversold and anything below 20 is considered extremely oversold. We are just not there yet. However, one thing I do want to highlight is for the first time in months the aforementioned key indices have all fallen and closed below their 50-day moving averages. Something that has not occurred since early October of last year and something we want to keep an eye on. If the markets cannot rise back and remain above their 50-day in the near future, the 200-day support line could be the next real support for these markets. I am not suggesting that we will test the 200-day moving average, but if this is the case, the selling pressure would most likely continue and may actually increase. Let’s see how next week’s earnings reports come in before we draw any further conclusions.

Looking ahead to next week, we will here earnings results from petroleum producer Anadarko (NYSE: APC), real estate investment trust Annaly Capital Management (NYSE: NLY), Yum Brands (NYSE: YUM), Boston Scientific Corp  (NYSE: BSX), retailer Michael Kors (NYSE: KORS), Cognizant Technology Solutions Corp (NasdaqGS: CTSH), Green Mountain Coffee Roasters (NasdaqGS: GMCR), Pandora Media (NYSE: P), AOL Inc. (NYSE: AOL), Expedia (NasdaqGS: EXPE), General Motors (NYSE: GM), Verisign Inc. (NasdaqGS: VRSN), Apollo Global Management (NYSE: APO), Flir Systems (NasdaqGS: FLIR) and Moody’s Corp (NYSE: MCO) just to name a few. So as earnings reporting season continues, so do the markets. Good luck to all.

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

 

 

Happy New Year!

Posted on by George Mahfouz

If 2014 comes anywhere near the performance the overall markets experienced last year, once again the bulls will be popping champagne. For the year 2013, the Dow Jones Industrial Average (chart) closed up a breathtaking 26.5%, the Nasdaq (chart) finished the year up a staggering 38%, the S&P 500 (chart) booked a spectacular gain of almost 30% and the small-cap Russell 2000 (chart) soared 37%. I think it’s safe to say that an exact repeat of 2013’s performance is highly unlikely, but there is seemingly no reason to believe that this momentum won’t continue into the new year. Even the key indices in Europe had very impressive double digit gains in 2013 with the German DAX index leading the way surging 26% on the year.

With that said, the first thing that pops out to me is that the aforementioned key indices are all now near or completely in overbought territory according to the Relative Strength Index (RSI) technical indicator. We have been monitoring these indexes since October of 2013 to see when they may go into extreme overbought conditions and with the powerful year end close, we now have 3 of the 4 key indexes officially in overbought territory with the Russell 2000 (chart) only a few value points to go. So what does this all mean for the investor or even more so, to the trader? By now all of you know that I personally view the RSI as a reliable technical indicator distinguishing whether an index or stock for that matter is overbought or oversold. In fact, certain computer algorithmic trading models are designed to act whenever extreme conditions occur in a given market or stock. Let’s recap the definition of the Relative Strength Index or the RSI. In the most simplest terms, 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. And as mentioned the majority of the key indices along with dozens of stocks are now in overbought territory. This doesn’t mean that we will all of a sudden see a dramatic turn in the opposite direction, however, typically when stocks or indexes are in overbought or oversold conditions such as they are now, at some point in time, a change of direction ensues.

The wild card that will most certainly continue to play out is of course the Federal Reserve and what course of action they will take and uphold in 2014. Especially now that the Fed has started to reduce its asset purchases. We all know that the accommodative policies of the Fed over the past few years has placed a floor under these markets and whenever any attempt of a pullback or mini-correction has occurred, that condition has been met with unprecedented support, hence new market highs followed. I would expect as long as the Fed continues to support the bond and mortgage backed securities markets, even at a reduced rate, whatever pullbacks or retracements that do occur, buyers will be anxiously awaiting to add to their positions or open new ones.

I do expect a healthy 5%, 10% or even 15% correction in 2014 and if you have the gumption to go short, this could serve you well. Of course no one knows if or when this correction may take place, however, as highlighted, we are now in overbought territory which could be one of the catalysts to prompt a pullback or even a subtle correction. Should we get this healthy correction, we will be looking into the financial and technology sectors to identify opportunities to capitalize on. Please note this is not a recommendation to go short or long any asset or index, and it is prudent to consult with a certified financial planner(s) before making any investment decisions.

Good luck to all and both Paula and I wish everyone a very safe, prosperous and Happy New Year 🙂

~George

Pullback #1

Posted on by George Mahfouz

I have been blogging for while now that a pullback at some point is inevitable and would even be healthy considering the parabolic move most of the key indexes and many stocks have had so far this year. However, there seemingly has not been a meaningful catalyst to trigger a noticeable pullback or better yet a healthy 10% correction, until maybe now? Taper talk is back on the table at the highest level since late May thanks to the continuing flow of recent positive economic data. In fact, some pundits predict that the Federal Reserve will begin reducing its asset purchases as early as this upcoming week. This chatter has been enough for the markets to take notice with the Dow Jones Industrial Average (chart) falling 264 points this week or 1.7%, the Nasdaq (chart) retreated by 1.5%, the S&P 500 (chart) gave back 1.6% and the small-cap Russell 2000 (chart) closed the week lower by 2.2%. Now let’s keep this into perspective, these benchmark indices on the year are still up a whopping 20%, 35.5%, 24.5% and 30% respectively.

What everyone has been accustom to for the past couple of years is that the protractive accommodative policies of the central banks from around the world would keep a floor under the markets, which most certainly has been the case. However, in late May of this year there had been widespread speculation that the Fed would indeed begin to reduce its bond buying and mortgage backed security purchases which sent the markets lower by over 5% by late June. The tapering fear at that point became unfounded as the economic data back then was still coming in too skittish in the Fed’s eyes.

Fast forward to today and there may now be enough positive economic data such as Q3 GDP coming in at 3.6%, the labor market showing signs of strength, personal spending rising and overall business confidence improving. These signs could be enough for the Fed to slowly reduce its asset purchases. So now the question on all minds is “how will stocks react once the Fed begins to taper?” This subject is currently being highly debated in most circles of the financial world and quite frankly no one knows. I suspect that the Fed will start to taper sooner than later but that they would be very conscious and conservative with their approach and how they signal their future actions. That said, once the central bank removes itself from the limelight and allow the markets to trade in a normal environment and on their own merits, I would expect volatility to get back to normal levels, hence, healthy pullbacks and even corrections should be back on the table. With this type of market environment, both long and short traders would be able to compose strategies based off of fundamentals and have the confidence to act accordingly.

Both Paula and I wish everyone a very safe, healthy and happy holiday season 🙂

~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

No Bubble Here…

Posted on by George Mahfouz

At least according to Janet Yellen as she spoke before the Senate Banking Committee on Thursday. In a prepared speech to the committee, Vice Chair Yellen stated that the U.S. economy continues to improve and that the housing market has turned a corner with construction, home prices and sales up significantly. Ms. Yellen went on to indicate that she supports the Federal Reserve’s monetary policies which continue to purchase bonds and mortgage backed securities. Investors took this cue as a very positive sign going forward and sent the markets yet again to all time highs this past week.

For the week, the Dow Jones Industrial Average (chart) closed up 1.3% and is also closing in on the 16,000 mark, the S&P 500 (chart) gained 1.6%, the Nasdaq (chart) +1.5% and the small-cap Russell 2000 (chart) finished the week up 1.47%. Stocks continue to be on a tear and now it is clear that unless their is some unforeseen negative macro-event that occurs from now until year end, these markets should close the year out with over 20% gains respectively. Now that doesn’t mean that pullbacks or even a modest correction couldn’t occur, but should this be the case, I would assume that any retracement would be met with the “buying the dip” mentally that has gone on all year long.

Now let’s take a look at how the technical conditions are shaping up for the aformentioned key indices. When I consider running a technical analysis on stocks or indexes, the two indicators I favor the most are the Relative Strength Index also know as the RSI and the moving averages. Out of plethora of technical indicators out there, these particular indicators are the most reliable, at least for me. Part of the reason why I favor the RSI and moving averages indicators are that many computerized trading models and certain institutional investors utilize them, which in turn moves the market. Historically, when the Relative Strength Index (RSI) is at an overbought or oversold condition, the majority of the time the asset or index reverts back to the mean. Same rings true with the moving averages, whenever a stock or index rises up against or comes down to its moving average, typically the stock or index finds support or resistance. So in looking at the current state of the Dow (chart), S&P 500 (chart) , Nasdaq (chart) and the Russell 2000 (chart) all of these indexes are indeed approaching overbought territory which according to the RSI definition is the 70 value level, but they are not there yet. Actually, my personal preference is to not only see a breach of the 70 value level but a continuation up into overbought territory before I consider selling into that condition. As it pertains to the moving averages technical indicator, these key indices are all comfortably above their respective 20-day and 50-day averages, with the 200-day moving average no where in sight.

So what does all of this mean? Technically speaking and considering we are heading into year end, there is a high likelihood that markets continue to head north, but I will be paying close attention to the technicals as to when we may see the inevitable pullback.

Good luck to all and have a great weekend 🙂

~George

Stocks and Indexes Continue to Set Records!

Posted on by George Mahfouz

The month of October proved to be yet another record setter with a number of stocks from a variety of sectors hitting all time highs and the S&P 500 (chart) setting a new record high of 1775.22 on Wednesday. The Dow Jones Industrial Average (chart), the Nasdaq (chart) and the small-cap Russell 2000 (chart) all hit 52 week highs as well on Wednesday. This seemingly unstoppable bull run is unprecedented with gains of over 20% on most of the key indices year to date. I think it is fair to say a pause is overdue and would most likely be very healthy for the overall market.

In last month’s opening blog, I discussed how selling options premium can be beneficial in times of increased volatility, and in particular the “covered call” strategy. Today I would like to cover “selling puts” as a way to create options premium income. Unlike the “covered call” strategy where you must own the underlying security in order to “write or sell” a covered call, selling a put does not require you to own the security. However, by selling a put, you are potentially obligated to purchase the security should it close below the strike price you chose on its expiration day.

Let’s look at an example of selling a put on a given stock and like last month I will use Facebook (NasdaqGS: FB) as the example. Facebook is currently trading around $50 dollars a share. In looking at the options chain on Facebook and its current pricing, the December $48 puts are bidding around $2.00 dollars per contract. If an investor were to sell 10 December $48 dollar puts on Facebook for $2.00 per contract, that investor would bring in $2,000 dollars in premium less transactions costs. If Facebook closes above $48.00 dollars a share on expiration Friday in December, the investor would keep the entire premium he collected. However, by selling the 10 put option contracts, the investor has the obligation to purchase 1000 shares of Facebook should Facebook close below $48.00 per share on expiration Friday in December. It’s important to note that before considering and implementing a “selling put” strategy you must be willing to own the stock at the strike price you sold the puts on and in this Facebook example, that would be $48.00. However, your cost basis would not be $48.00 because you received $2.00 in premium when you sold the puts, therefore, your cost basis would be $46.00 per share less transactions costs.

Please also note this is not a recommendation to sell puts on Facebook or any other asset or index. This is merely another example of how an investor can capitalize on selling options premium. In closing and as I always suggest, please consult with a certified financial planner(s) before making any investment decisions.

Have a great weekend 🙂

~George

Finally Congress Gets a Deal Done!

Posted on by George Mahfouz

After 16 days of a partial government shutdown, Congress finally came to terms to reopen the government and raise the debt ceiling. Talk about waiting until the last minute! Needless to say, stocks over the past couple of weeks have experienced an increase in volatility with triple digit gains and losses during the shutdown. Despite the turmoil in Washington, the Dow Jones Industrial Average (chart) on Wednesday closed up over 200 points, the Nasdaq (chart) managed to close at a 13 year high, the S&P 500 (chart) is nearing its all time high and the small-cap Russell 2000 (chart) finished the trading day at an all time record. Now the street can focus on Q3 earnings reporting season and so far, not so good.

After the close yesterday, bellwether International Business Machines (NYSE: IBM) shocked the street by missing revenues by almost $1 billion dollars and is down nearly seven percent in pre-market trading. Also after the close yesterday, Ebay (NasdaqGS: EBAY) reported in-line revenues, however guided lower for the upcoming holiday season. With Q3 earnings reporting season kicking into to high gear, I am questioning whether or not this will become the trend for the quarter? Most analysts do not expect this to be a robust quarter for corporate America, so now the question becomes does the imminent pullback in stocks become a buying opportunity before year end? Quite frankly with the headline risk out of Washington seemingly over for now, I beleive that the trend of pullbacks being bought will continue between now and year-end. I will look at key technical support levels for possible entries, and on the S&P 500 (chart) the 1680 zone appears to be the first level of support, which also happens to be its 50-day moving average, followed by the 1620 area. What gives me this vote of confidence of a continuing bull market into year-end is not necessarily how corporate earnings will fair, but the fact that the Federal Reserve continues to promise that it will do whatever it takes to support the economy, hence the bull market should continue. That said, when the Federal Reserve begins to taper, this will be the time that corporate America will truly need demonstrate top-line growth. In closing, no matter how your portfolio is positioned, it is usually the best practice to implement some type of protective stop initiative and of course always consult with a certified financial professional(s) while considering any investment strategy. Good luck to all. 🙂

~George