Strong Economy Equals A Strong Stock Market!

The economy posted a 3.2% gain in the first quarter and as the saying goes, a strong economy equals a strong stock market! Is it any wonder as to why the Nasdaq Composite (see chart here) hit an all-time high on Monday! The same rings true with the S&P 500 (see chart below). The S&P 500 hit an all-time high on Monday as well. Now the Dow Jones Industrial Average (see chart here) has a bit more work to do in order to tap its own record as does the small-cap Russell 2000 (see chart here). However, I am sure the bulls will take 2 out of the 4 major averages setting all time highs. What is also helping the stock market is how the Federal Reserve has taken a cautious approach to raising rates any further. In fact, there are calls out of Washington DC asking the Fed to start lowering rates to stimulate the economy even further. Now I am not so sure that the Fed will accommodate Washington’s request, but I do think it is safe to say that we should not see a rate hike in the near future or maybe not at all for the rest of this year.

One note of caution to me is that with nearly half of corporate America reporting their Q1 earnings so far, we are seeing on average a year over year decline in earnings. There are still 100’s of companies set to report over the coming weeks but if this trend continues, this will be the first year over year decline in corporate earnings in years. I will be keeping an eye on this development.

The technical shape of the aforementioned indexes remain intact. The Dow, Nasdaq, S&P 500 and the Russell 2000 all are trading above their respective key moving averages. However, both the Nasdaq Composite (see chart here) and the S&P 500 (see chart here) have entered into overbought territory according to the relative strength index also know as the RSI. That said, I would not be surprised to see at the very least some consolidation or an outright healthy pullback. Good luck to all 🙂

~George

S&P 500 - Paula Mahfouz

What Bear Market?

The major averages in December entered into bear market territory and seemingly was heading even lower. But lo and behold and fast forward to today and we see that the key indices have all come roaring back.  The definition of a “bear market” is when a stock or an index goes down 20% or more from its highs and that was definitely the case in the second half of 2018. The Dow Jones Industrial (see chart here) is now back over 24,000 after dropping below 22,000 in December, the S&P 500 (see chart here) is back over 2,600 after dropping below 2,400, the Nasdaq Composite (see chart here) is now over 7,100 after hitting a low of 6,190 and the small-cap Russell 2000 (see chart here) it trading above 1,400 after hitting a low in December of 1,267.

The sharp V shaped bounce back in such a short period of time is very impressive. I do not think anyone expected such a sharp rebound in just a month. This surprise move is also happening despite the ever increasing chaos and turmoil out of Washington DC. Is it me or has it gotten to the point of utter disgust with what is happening to our country. I am not much of a political advocate in either direction but the narcissism and antics coming out of DC is unbelievable. What’s more is that they are using the government shutdown as the pawn to get their way, again unbelievable.

Ok enough of that and back to the markets. We are now heading straight into earnings reporting season and to me this without a doubt will be a significant catalyst as to whether or not stocks will continue to rise or pause. Of course any type of meaningful progress with the trade war and China could also play a major role. The Federal Reserve has been more vocal with interest rates and indicating that they are more apt to more of a wait and see approach as to any additional rate hikes in near term. There is a lot at hand here which should determine whether or not this bounce back rally will continue. Good luck to all 🙂

~George

Traders And Investors Are Awaiting A September Selloff…

Traders and investors are awaiting a September selloff that actually may not come. Stocks continue to demonstrate strength and resiliency despite the political turmoil in Washington DC, rising interest rates and a seasonality headwind that just isn’t happening. August and September are typically weaker months for the stock market, instead the S&P 500 (see chart below), the Nasdaq Composite (chart) and the small-cap Russell 2000 (chart) hit all-time record highs and the end of August and despite a mini pullback shortly thereafter, the markets appear to have stabilized near all time highs. The Dow Jones Industrial Average (chart) did not make an all-time high in August, however, this index remains within striking distance of its all time high. The pundits are speaking to the strength of corporate America where earnings and profits are at their highest levels in decades as to the reason why the markets are not selling off. What is undeniable is that any time stocks have experienced a pull back it has been met with support from institutional investors and retail investors alike.

Speaking of support, let’s take a closer look at the technical shape of the aforementioned key indexes. Let’s start with the S&P 500 (chart). After pulling back to its 20-day moving average the S&P is right back at a breakout point. Next week we should see if the S&P can indeed breakout or fail and head back to its 20-day. The Nasdaq Composite index (chart) has similar chart pattern although it traded a bit below its 20-day support line for a few days before recapturing its 20-day and is now trading above it. A look at the Russell 2000 (chart), it too closed above its 20-day moving average and last but not least the Dow Jones Industrial Average (chart) also closed above its 20-day and this index is also right at a breakout or breakdown point. These bellwether indexes are also not in an extreme overbought condition according to the Relative Strength Index. The RSI tracks overbought or oversold conditions and is a momentum indicator that measures the degree and velocity of recent price changes to determine what is overbought and what may be oversold. We are simply not in any extreme condition according to the RSI principle.

Let’s see how the back half of September plays out and we will revisit the technical set-up of the markets in October. Good luck to all 🙂

~George

S&P 500 - George Mahfouz Jr