trader

Stocks Are In A Tailspin!

Posted on by George Mahfouz

After starting the year off in sell mode, stocks are accelerating their declines and are now in correction territory. Yesterday’s rally sparked hope that a short term bottom was put in, however, this is not the case as the Dow Jones Industrial Average (chart) plunged 400 points at today’s open, the Nasdaq (chart) opened lower by over 100 points, the S&P 500 (chart) opened down over 2% and the small-cap Russell 2000 (chart) is now trading below 1000. What gives? First and foremost, China’s Shanghai Composite Index has lost over 20% of its value since late December and is now in a bear market. China’s market fall has indeed spilled over into the global markets. Secondly, crude oil (chart) has continued to decline and is now trading below $30 per bbl spreading fears of widespread bankruptcies in the oil and gas space. These two factors alone have been enough to send our markets into correction mode.

That said, what I try to do in this type of market environment is to place emotions in check and to keep things into perspective. Since this bull market began in 2009, we have not really experienced a market correction. Yes, it has been over six years since we have had a meaningful market decline that has stuck. People tend to forget that market corrections can be a very healthy thing for an overextended market. Investors and traders alike have been spoiled over the past six years by essentially taking their positions and switching on auto-pilot. I believe those days are gone and they should be. When the Federal Reserve took action and began their aggressive monetary policies i.e. buying bonds and placing interest rates at or near zero, stocks took off and did not look back. We have not been in a normalized market environment since then.

Fast forward to today and with essentially no Fed intervention and with a change in interest rate policy, we now have markets trading off of economic and corporate merits. This to me is not a bad thing because now investors can assess the value of the markets as well as individual stocks more accurately and more confidently. This is a concept that most traders and investors have been waiting on and that is to make their investment decisions based off of facts and not what the Federal Reserve will or will not do.

Good luck to all 🙂

~George

Volatility Is Back, Q3 Earnings Reporting Season On Deck…

Posted on by George Mahfouz

After being in hibernation for most of the year, volatility is back at the forefront of the markets. The Volatility Index Symbol: VIX (chart) has spiked about 50% over the past couple of weeks which is a clear indication that investors are starting to get a bit nervous and fearful of the markets. The VIX demonstrates the next 30-day expectation of market volatility by calculating the implied volatilities of both puts and calls options of S&P 500 companies. Even the Dow Jones Industrial Average (chart) have experienced intraday triple digit swings over the past several trading days, something we have not seen in a long time. I think it is safe to say that the increase in vol is due in part to the markets continuing to post record highs, the fact that the federal reserve will be ending its asset purchase program this month and seemingly everyday now headlines of geopolitical uncertainty are abound . Furthermore, with the third quarter of the year now in the books, earnings reporting season is upon us. I don’t think it’s a coincidence that volatility has increased with all of the aforementioned factors in play. In fact, this particular earnings reporting season will  most likely be put under the microscope like no other recent quarter. Stocks have enjoyed the the accommodative policies of the Fed for the past several years and now one of the key components of the stimulus program will end here in October. As I mentioned in my previous blog, it will be up to corporate America to stand on its own two feet and begin to demonstrate top-line growth as they grow their earnings. Over the past couple of years many corporations have grown their bottom line by way of becoming more efficient, reducing their workforce and implementing stock buyback programs. I believe going forward financial engineering and in-house efficiencies won’t be enough to satisfy investors appetites.

As the third quarter ends and technically speaking, the Dow Jones Industrial Average (chart), the Nasdaq (chart), and the S&P 500 (chart) appear to be finding some support at their respective 50-day moving averages, however, the small-cap Russell 2000 (chart) continues to lag the big-caps and trade well below its 50-day and 200-day moving average. That said, what is impressive to me is even though volatility has picked up steam, most every pullback is met with support from willing buyers and sell-offs appear to be short lived. The concern I have is whether or not this pattern of support continues. As mentioned, Q3 earnings reporting season is on deck and I do not believe companies will be given free passes anymore to modest top-line growth. If you are a trader, this is type of environment that you have been waiting for. However, if you are an investor with a longer term view, then it is time to look at the intrinsic value of your holdings to reduce the impact of a higher vol environment. Also, options premiums tend to increase along with higher volatility which could bode well for option sellers. Whatever the case is, as we enter the last quarter of the year, I expect volatiily to continue and at points increase, which could create some panic selling and create great opportunities with the right companies. I am looking forward to this upcoming earnings reporting season and will look for oversold conditions to act.

Have a great October 🙂

~George

 

Nine in a row!

Posted on by George Mahfouz

The Dow Jones Industrial Average (chart) closed at a record high notching its ninth day in a row of gains. A streak not seen since 1996. Furthermore, the small-cap Russell 2000 (chart) and the Dow Jones Transportation Average (chart) also closed at record highs. The S&P 500 (chart) is also a hiccup away from a record. The momentum and year-to-date gains in these markets are breathtaking, especially when you consider all of the potential headline risks here and abroad.

As a trader or investor it’s incredibly tempting and seemingly logical to commence a short position thesis right now as everyday a new record is being set. However, picking a top or getting in the way of this parabolic move can be painful and costly. Also, it is very difficult to initiate new long positions when everyone on the street knows at some point and time a pullback in equities will occur.

So what’s a trader do in this market environment? Personally, I look for individual names that may be experiencing a “one time” event which may create a buying or selling opportunity. For example let’s take a look at Spectrum Pharmaceuticals, Inc. (NasdaqGS: SPPI). Here is a company that lost over 37% of its value today and traded over 22,000,000 shares which represents almost half of its float. The plunge in the company’s shares were due to an unexpected forecast by the company indicating their full year revenue will decline dramatically over its core drug Fusilev. This news definitely caught the street off guard especially after the company had expected sales to rise this year.

So when I see a haircut such as the one Spectrum received today, I immediately look to the fundamentals to see if this is an over reaction, or if there is more downward pressure ahead. After taking a gander at the fundies, the one thing that stood out to me was the significant short interest in the stock. According to nasdaq.com, as of February 28th the short interest in Spectrum stood at a whopping 27,231,552 shares. This is almost 50% of the entire outstanding shares held short. Now who knows how much of the short position has covered since February 28th, or how many shares remain short? Of course, this is not the only metric I look at when considering taking action, but this particular metric most certainly stood out to me. What I have seen in the past with other scenario’s such as this, with such a large short position, and after a major sell-off such as the one Spectrum experienced today, at the very bare minimum some type of short covering rally typically ensues.

By no means am I suggesting to go long or short Spectrum or any other asset or index, what I am doing is highlighting the fact that in any macro-market environment whether its overbought or oversold, if you do your research and subsequent due diligence, there can be opportunities found long or short. That said, it is always best and in this environment required to consult a certified financial professional before considering any investment or investment strategy.

Have a good evening.

~George

Impressive resilience…

Posted on by George Mahfouz

Despite the incessant flow of “fiscal cliff” news from all of the media outlets, stocks continue to hold their own. For the week, the Dow Jones Industrial Average (chart) closed up 1%, the S&P 500 (chart) + 0.13%, the Nasdaq (chart) -1.07% and the small-cap Russell 2000 (chart) finished the week flat. Not too shabby considering all of the fear and uncertainty surrounding the fiscal cliff and that Washington has not really progressed towards a deal.

With only a few weeks left in trading year and the fiscal cliff deadline, what is an investor or trader to do? Well if you are a trader you should love this type of environment. I am expecting volatility to pick up steam between now an year end. This should present larger market swings and provide excellent trading opportunities both on the long and short side. If you are an investor you may want to sit it out until we get a deal out of Washington. I remember the days when you would make investment or trading decisions based on fundamentals and technical analysis. Now seemingly the biggest factors are whether or not the central banks will continue to support the markets and whether or not Washington can get along. Needless to say, this dynamic has placed additional uncertainty on the markets and investors or traders now have to add this in the mix of their decision making processes. Good luck to all.

Have a great weekend 🙂

~George