traders

Happy New Year!

Posted on by George Mahfouz

2015 essentially proved to be a flat to down year for stocks taking some investors and traders by surprise. The Dow Jones Industrial Average (chart) closed the year down 2.2%, the S&P 500 (chart) minus dividends closed down just under 1%, the Nasdaq (chart) closed up 5.73% and the small-cap Russell 2000 (chart) closed the year down 5.71%. What’s more is how crude oil (chart) fared in 2015 declining more than 30% which also had weighed heavily on the aforementioned indices.

Looking ahead to this year, stocks find themselves in a place where they haven’t been in quite sometime and that is a rising interest rate environment. Historically speaking, equities tend to be under pressure at the beginning of and throughout a rate hike cycle with the exception of cyclical stocks and certain commodities. However this time may be different. In the past when the Federal Reserve begins to raise interest rates it is usually to fend off inflation and/or to cool off the economy when it becomes too hot. From my view and from the data flow, this is not the environment we find ourselves in today. So I do not expect that the Federal Reserve would raise rates aggressively or too quickly. With that said, the markets might not trade the way they would if we were in an inflationary environment with rising interest rates. Nonetheless, I do think that more volatility will come into stocks in 2016 and it will become more of a stock pickers market.

Furthermore, the technical shape of the market appears to be setting up for more downward movement as the key indexes have breached or are about to breach their respective 200-day moving averages. However, it would take days of trading below their 200-day to set off an alarm at least from a technical perspective. Let’s see how the first week of trading in the new year plays out before making any sort of definitive technical opinion.

Both Paula and I sincerely wish everyone the healthiest, happiest, safest and most prosperus New Year yet 🙂

~George

Finally The Fed Raises Rates!

Posted on by George Mahfouz

After 9 years of essentiality zero percent interest rates, the Federal Reserve today raised its benchmark interest rate one quarter of one point. Investor’s embraced the Fed’s action lifting all of the key major averages. The Dow Jones Industrial Average (chart) closed up 224 points, the Nasdaq (chart) up 76 points, the S&P 500 (chart) up 29 points and the small-cap Russell 2000 (chart) closed out the session up 17 points. The street gained confidence when Fed officials also provided clarity as to their upcoming intentions regarding further rate hikes. Such hikes would only move up between 0.25% and 0.5% and would be subject to future economic activity and data. Another takeaway today is that the Federal Reserve has enough confidence in the current economy to raise rates and confidence in future growth in the foreseeable future. If you are bullish on the markets it doesn’t get better than this. Which is a tepid Federal Reserve while considering raising rates and an economic backdrop that seemingly is demonstrating growth albeit in a moderate manner.

So which sectors could benefit the most from a rising interest rate environment? One sector I will turn my attention to is the banking sector. Banks tend to earn more when rates move up simply because they can charge more interest on the loans they make. There are individual bank names that one can consider but for me personally I would rather position myself in the largest banking exchange traded fund (ETF) Symbol: XLF. The XLF’s top holdings include the likes of Wells Fargo & Company (NYSE: WFC), JP Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) Citigroup (NYSE: C) and Goldman Sachs (NYSE: GS) just to name a few. So you get the diversity of multiple money center banks and other banking related institutions which spreads out some risk. That said, it is best practice to consult with your financial advisor(s) before making any investment decisions.

I do think that investors and traders alike can now breathe a sigh of relief now that the Fed has made its first move and the markets cheered that with enthusiasm. Good luck to all!

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

~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

Not Even The Dog Days Of Summer Can Slow Down This Bull!

Posted on by George Mahfouz

Stocks once again defied logic setting records in the month of August, which is typically a soft month for equities. For the month, the Dow Jones Industrial Average (chart) finished up 3.2%, the tech-heavy Nasdaq (chart) closed the month up 4.8%, the S&P 500 (chart) gained 3.8% and the small-cap Russell 2000 (chart) closed the month up 4.85%. Now granted these gains came on relatively low volume, but nonetheless a very impressive performance considering the macro environment we are in especially with the geopolitical concerns in the middle-east and Ukraine. I suppose the U.S. economic numbers that have come out recently is part of the reason why stocks continue to march north. Last Thursday the Commerce Department revised the second quarter U.S. gross domestic product (G.D.P.) number to 4.2% which is quite a healthy expansion of our economy and what’s more, the sources of growth were broad based.

Looking ahead to this month, when traders and investors come back from their summer vacations, they will see all time highs for the S&P 500 (chart), the Dow Jones Industrial Average (chart) and don’t look now, even the Nasdaq (chart) is slowly approaching the 5000 mark, a mark that has not been seen since the tech-bubble of 2000. If you have been bearish or short this market, I do not know what to say other than I feel your pain. We have not had a 10% correction in equities in years now and just the slightest of pullbacks have been met with incessant support. I do not know what is going to break this trend and you know what they say, “the trend is your friend”. Enough of that, seriously, I too have been expecting at least a 5-10% correction, which if you are bullish, you should welcome it. Not only would this be healthy for the markets, in my view it’s getting to the point to where it’s almost required. I am beginning to become a little concerned that should a “black-swan” event occur, and history says “they happen when you least expect it” we could see such a sharp correction, that could trigger margin selling, which would lead to more selling pressure etc., we have all seen this movie before. I am not saying that this will take place, but if it does, and we if don’t have healthy corrections along the way, which we haven’t, this could magnify matters and we would be having a much different discussion.

With all that said, I will continue to monitor the economic numbers this month as well as the technical make-up of the aforementioned indices. Technically speaking, we are now approaching overbought territory according to the relative strength index (RSI). Paula and I wish everyone a very safe and Happy Labor Day 🙂

~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

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

 

Happy New Year!

Posted on by George Mahfouz

Despite all of the domestic and global political and economic uncertainties that persisted throughout 2012, the Dow Jones Industrial Average (chart) managed to gain 7.3% for the year, the Nasdaq (chart) soared 15.9%, the S&P 500 (chart) leaped by 13.4% and the small-cap Russell 2000 (chart) closed the year up notching a 14% gain. I think most investors and traders were caught off guard with the double digits gains that occurred in 2012, especially with the pending fiscal cliff dilemma that our country is facing. However, in the wee hours of this morning the Senate did overwhelmingly approve a bipartisan deal that is now headed over to the House for a vote. Here is what part of the revised deal looks like:

The new deal postpones for two months the start of $1.2 trillion in automatic spending cuts over 10 years, known as the “sequester.” For those two months, $24 billion in savings would be substituted. Half of those savings would be split between defense and non-defense programs. The other half includes new revenues.

Raises $600 billion in revenue over 10 years through a series of tax increases on wealthier Americans.

Permanently extends tax cuts made in 2001 by Republican President George W. Bush for income below $400,000 per individual, or $450,000 per family. Income above that level would be taxed at 39.6 percent, up from the current top rate of 35 percent.

Above that income threshold, capital gains and dividend tax rates would return to 20 percent from 15 percent.

Includes a permanent fix for the alternative minimum tax.

Extends child tax credit, earned income tax credit, and tuition tax credit for five years.

Extends unemployment insurance benefits for one year for 2 million people.

Avoids a cut in payments to doctors treating patients on Medicare – the so-called “doc fix.”

Temporarily extends farm programs.

So now we have to wait and see if the House of Representatives will pass this modified deal and hopefully we can get that answered today.

Have a very safe, healthy, prosperous and Happy New Year 🙂

All the best,

~George  

 

Will the month of December be jolly for stocks?

Posted on by George Mahfouz

Although the key indices finished essentially flat for the month of November, everyone now is asking “will a Santa Claus rally come into effect?” For the month, the Dow Jones Industrial Average (chart) closed lower by 0.55%, the Nasdaq (chart) finished up 1.11%, the S&P 500 (chart) +0.29% and the small-cap Russell 2000 (chart) closed the month up 0.39%.

With the ever increasing rhetoric coming out of Washington regarding the fiscal cliff and whether or not a deal can be made, I am not so sure that we can have a year end rally. Markets hate uncertainty and unfortunately it may take a market swoon for both sides of the aisle and the President to come together on a deal. If this is the case, we could indeed retest the mid-November lows on the S&P 500 (chart) which would be about 70 S&P points from the close on Friday. That said, the markets right now are so sensitive to every word that comes out of Washington, a rally could also occur should there be any positive developments. Most traders embrace this type of environment for it does produce opportunities on the long and short side.

Technically speaking, all of the aforementioned indexes including the transports remain above their respective 200-day moving averages and appear to want to go higher, however, politics and policy do hold the cards as to how we close out the year. Good luck to all.

Have a great weekend 🙂

~George