S&P 500

Despite a Partial Government Shutdown, Stocks Rally…

Posted on by George Mahfouz

No matter what has been thrown at this bull market over the past few years, nothing seemingly can slow it down. After the key indices finished the month of September with unlikely gains, stocks continued their upward trajectory today even though Congress couldn’t agree on a short term budget deal to keep our government fully operating.

For the first day of October, the Dow Jones Industrial Average (chart) finished up 62.03 points, the Nasdaq (chart) +46.50 points, the S&P 500 (chart) +13.45 points and the small-cap Russell 2000 (chart) closed the day up 13.64 points. Pundits are speculating that with the government in a partial shutdown, Congress will now have to address the debt ceiling and budget at the same time which a likely compromise will come forward on both issues, hence, bullish for stocks. Not sure if I fully agree with that thesis. Furthermore, the bulls make yet another case that by having this budget and possible debt ceiling impasse, this will keep the Federal Reserve in full accommodative policy mode. Now this in my opinion would be a more bullish thesis. However, lets not forget we have now entered into the fourth and final quarter of the year and third quarter earnings reporting season is on its way.

Needless to say, the markets have a ton to digest over the coming weeks including Q3 earnings reporting season and I am expecting volatility to continue to increase. From a technical standpoint, the Nasdaq (chart) and the small-cap Russell 2000 (chart) stunningly hit new 52-week highs today and continue to outperform the Dow Jones Industrials (chart) and the S&P 500 (chart). The Dow and S&P did bounce off of key support levels yesterday and have resumed their uptrends, at least for now. In addition, both the tech-heavy Nasdaq (chart) and small-cap Russell 2000 (chart) are once again approaching overbought territory heading right into earnings reporting season, which could be of interest to the bear camp.

As volatility increases, one strategy that can potentially bode well is to sell option premium on select indexes or stocks in order to capitalize on the increased vol. This strategy is not for the novice and one should consult with a certified financial consultant before implementing any strategy, especially options strategies. But for the more advanced investor or trader, this type of environment is almost perfect to participate in a “selling option premium” program. Option premium is essentially income generated by an investor who sells premium to another party and hopes to keep the entire premium without having the option exercised. Let’s look at one example of a “selling premium, covered call strategy”. Let’s assume you own 1000 shares of Facebook (NasdaqGS: FB) at $50 per share. You can choose to “sell” a.k.a.”write” a covered call option on the Facebook shares you own. If you take the monthly October $52.50 calls that are currently trading for $1.20 and sell/write them against your position, you would take in $1,200.00 less transactions costs. This is the premium you would receive for writing/selling this covered call. If Facebook closes below $52.50 on expiration day you keep the entire premium as well as your 1000 shares. If Facebook closes above $52.50 on expiration day you still keep the entire premium earned, however, your 1000 shares of Facebook would be called away at $52.50 because you sold your rights to the stock you own to another party for $52.50. If this is the case, you would be a not only be benefiting from the options premium income, but also a stock appreciation outcome for in this example the initial cost basis for the Facebook position is $50.00 per share. So you would gain an additional $2.50 per share in profit. Please note that a covered call strategy is typically a bullish strategy and again this is just one example of how “selling options premium” can work. In closing, this is not a recommendation just an illustration on how an investor or trader can potentially benefit with option premiums. Please remember it’s always best to consult with a certified financial planner(s) before implementing any investment strategy.

Good luck to all 🙂

~George

 

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

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

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

 

 

Q1 in the books, and what a quarter it was!

Posted on by George Mahfouz

Stocks posted one of their largest percentage quarterly gains in years. In the first three months of 2013, the Dow Jones Industrial Average (chart) soared 11.3%, the Nasdaq (chart) gained 8.2%, the S&P 500 (chart) posted a record close to end the Q, and the small-cap Russell 2000 (chart) produced a staggering 12% gain. Who would have thought that the major averages would have such a stellar performance to start the year? Especially when considering the sequester ramifications, the Cypress crisis and the mixed signals that the economy here has been sending.

Now that Q1 is over, will there be an encore performance in Q2? Well we won’t have to look very far but to the much anticipated earnings reporting season which begins next week. In my humble opinion, this Q1 earnings reporting season will be scrutinized like no other. If companies do not demonstrate meaningful top-line growth, this rally could indeed be challenged. At least, this is what logic would say. If you are a perma-bull, I suppose you could surmise that if earnings season turns out as a disappointment, this would give the Fed even more reason to continue its easy monetary policies. Let’s not forget that these policies are why we are breaking records seemingly everyday. There is no denying this bull market has been mainly fed by the stimulus programs the Fed (no pun intended) has implemented over the past four years or so. Sure, a lot of companies were forced to become more efficient during our own economic crisis but at some point in time, the top-line must grow and these markets must be able to stand own their own two feet. The real challenge that the Fed will ultimately face is how to begin to wind down its $85 billion a month bond buying program without rattling the markets. To me, if not handled properly and delicately, this would be the most powerful catalyst to stop this bull market right in its tracks.

Technically speaking, all of the key indices remain extended and near the 70 value level of the Relative Strength Index (RSI). I will remain extremely cautious in the near term when deploying any new capital into the markets especially on the long side. I do, however, expect volitlilty to increase due to the upcoming earnings reporting season. Good luck to all and have a very profitable month.

All the best 🙂

~George