Is More Volatility Ahead?

The month of August proved to be one of the more volatile months so far this year. The question now is will this volatility continue here in September? As long as the turbulent tweets continue out of Washington, I bet the vol we witnessed in August will indeed continue this month. Markets hate uncertainty and as long as our President continues to flip flop seemingly daily and then tweet about it, we could very well be in for more vol. It’s not rocket science, when the tweets are positive and have consistency, stocks go green. Then when the flip flopping occurs they go red. It is amazing to me how stocks react to every single tweet or flip out of Washington. Sure there are algorithms that are programmed to react to headlines, but because of the constant noise out of Washington it’s no wonder we have been whipsawing around.

I always try to tune out the noise and focus on the fundamentals and technical shape of the markets. Let’s take a look at the current price to earnings ratio (click here) of the S&P 500. The S&P 500 (see chart here) price to earnings ratio continues to trade above historic norms. Despite all of the current uncertainties especially with the trade war, stocks on average are still trading above the 20 PE ratio level. The historic price to earnings average for the S&P 500 is somewhere in the mid-teens. So from a fundamental valuation standpoint the markets remain at the upper end of the channel. There are many other valuation metrics and government policies that play into the valuation analysis mix, but purely from a price to earnings ratio, one can ascertain that we remain a bit overpriced.

That said, companies can certainly grow into their current valuations but we definitely need to get the trade war with China resolved so that companies know where they stand. Both Paula and I wish everyone a very happy and safe Labor Day weekend 🙂

~George

 

Is It Time To Hedge?

As we remain in one of the strongest bull markets ever, is it time to hedge? Whoever has tried to short the market this year or for that matter the last nine years understands this has not been an effective strategy to say the least. However, as we are now entering the height Q3 earnings reporting season and as I mentioned in my previous blog implementing a hedge strategy could provide continuing beta should the bull market carry on yet offer profits in the event stocks or indexes go down. The strategy I am referring to is an options strategy called a “straddle”. A straddle is when an investor buys a call and a put option with the same strike price and expiration date with the selected strike price as close as possible to the current stock price of the underlying asset. Let’s take Intel as an example: Intel (NasdaqGS: INTC) closed on Friday at $39.67 and is scheduled report their earnings results on October 25th. Taking a look at the November $40 strike price on Intel, the call option is approximate $0.83 per contract and the put option is approximately $1.34 per contract. So if an investor/trader decides to put a straddle on Intel at this particular strike price, the total cost of the straddle is $2.17. You arrive at this number by simply adding up the cost of the put and call option. Where you profit from this trade is if Intel trades north or south of $40 by more than the total cost of the trade and before expiration.

One of the reasons why straddles can be effective during earnings reporting season is that earnings can be a huge catalyst for stock price movement. This especially rings true when a company surprises to the up or downside. With a straddle it does not matter which direction the underlying asset moves, so long at it moves greater than the total cost of the straddle. The risk with the straddle is if the underlying asset does not have a big move in either direction before the straddle expires. Options do have an expiration date so you have to make sure that the catalyst occurs before the expiration date and even then allow yourself time for the full potential to play out. I also look for the historic movement of a stock or index to see if it does move greater than the cost of any given straddle regardless of a “catalyst”. That said, options and options strategies are extremely risky and volatile and you should always consult with a certified financial planner before considering any new strategy. Good luck to all 🙂

~George

Back To Setting Records!

After a tumultuous and volatile month, stocks are back to their old habits. The Dow Jones Industrial Average (chart) and the S&P (chart) 500 both closed at record highs. The month of October also saw the Nasdaq (chart) finish up over 3% and the small-cap Russell 2000 (chart) closed the month out up an eye-popping 6.5%. So as far as the long awaited correction goes, lets take a look. The Dow (chart) from it’s previous all-time high corrected 8.61%, while the S&P 500 (chart) retraced 9.83% by mid-October. Not quite the text book healthy 10% correction most investors were looking for, but close enough. The question I have is, will this snap-back rally to new all-time highs hold? Earnings for the most part have been coming in pretty good, however I have not seen the robust top-line growth you would expect in order to keep setting new records. Nonetheless, easy global monetary policies continue to keep not only a floor under these markets, but provide enough juice to lift the markets to new highs. Just yesterday the Bank of Japan unexpectedly raised its bond buying program from JPY 70 trillion to 80 trillion and it also tripled its ETF buying to JPY 3 trillion. So as long as the federal reserves from around the world continue to increase their balance sheets, the bulls should have the upper hand.

The concern I have with the most recent market correction is that it didn’t last very long. It’s true that over the past five years most modest pullbacks immediately snapped back, just like this latest quasi-correction did. Personally, I would of liked the correction to last a little longer and go a little deeper for it feel like a meaningful correction. Because of the markets most recent snap back rally, all of the major averages are now fast approaching overbought conditions according the the Relative Strength Index (RSI). I truly think early next week will be the tell. If we continue to lift, then we will certainly breach the 70 value level of the RSI and enter into overbought territory and possibly remain overbought for the rest of the year. However, if the rally stalls, we could easily reverse and then who knows? Add the wildcard of mid-term elections this upcoming week into the mix, and most likely volatility comes back into the forefront. For me I am going to the sidelines until after the mid-term elections are over, and also to see if we stall here at record levels. Good luck to all and have a great weekend 🙂

~George

 

A week of respite for stocks…

Despite the Dow, Nasdaq, S&P 500 and the Russell all finishing lower on Friday, these key indices finally completed a week in positive territory. In fact, this is the first positive week for the bellwether indexes in the month of May. For the week, the Dow Jones Industrial Average (chart) closed up 0.69%, the Nasdaq (chart) +2.11%, the S&P 500 (chart) +1.74% and the Russell 2000 (chart) gained 2.57%.

Without question the markets last Monday experienced a technical bounce due to oversold conditions across the board. What was impressive to me is that equities for the most part managed to hold on to their gains. Not so sure if this will be the case this upcoming week. Between the never ending saga from across the pond and a slew of economic reports from here at home, next week is setting up to be to be a very volatile week. The most critical economic report that all will be watching is Friday’s jobs report. If we do not begin to see the private sector strengthen in a meaningful way, we could be in for a long summer and a possible new administration this fall. Good luck to all.

Have a safe and healthy Memorial Day weekend 🙂

~George