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Gregory is the President and Investment Advisor of Axcel Capital Management, LLC. He directs all research, analysis, and corporate strategy for the ACM Managed Account Programs. He is a former U.S. Army officer and a graduate of Hampton University. He began his career in investments in 2006 and... More
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Axcel Capital Management, LLC
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Axcel Capital Management Market Commentary
  • August 2014 Market Commentary: Stocks Down For 1st Time Since January, What Next? 1 comment
    Aug 13, 2014 7:59 PM

    The largest single-day stock market drop in the past six months on the last day of the month of July has lead to the first monthly losses for the major U.S. stock market indices since January. For the month of July, the S&P 500 was down 1.5% and the Dow Jones Industrial Average (DJIA) was down 1.6%. For the year, S&P is currently up 4.5% and the Dow up 0.74% as of the end of July. Interest rates crept up slightly, with the 10-year Treasury note rate finishing the month at 2.56%.

    The Federal Reserve continued reduction of its quantitative easing program (the purchasing of treasury bonds to help provide liquidity to the economy), trimming purchases from 35 billion to 25 billion. The Fed also continued its dovish (market-accommodating) stance in indicating that it does not expect to raise interest rates until next summer, despite the strong GDP numbers this past month.

    What can we make of this monthly decline? For starters, does not come amidst an environment of poor economic data. Corporate earnings for the second quarter, for example, have been overwhelmingly positive - with over 70% of companies in the S&P 500 reporting earnings per share above their mean estimates. The Fed has made note of continually improving labor conditions, with jobless claims reports hitting 4 month lows earlier in July and the employment cost index rising due to larger-than-expected increases in wages. While the latter employment data has led to fears of inflation which may lead to the Fed raising interest rates sooner than expected, it was undoubtedly good news. Finally, consumer sentiment continues to rise, again reaching levels not seen since 2008.

    However, the sentiment that seems to be growing louder is that stocks are overvalued. Essentially, the latter part of the economic recovery since 2008 has consisted of stock prices rising faster than earnings, leading to uncomfortably high P/E (price/earnings) ratios. While this is not a new development, the question has always been when, not if, a market pullback would allow those ratios to return to their historical averages. In fact, the stock market has already gone 34 months since the last market correction (of 10% or more), versus a historical average of 18 months.

    From a technical perspective, the S&P 500 finished the month below its 50 day moving average - the third time this year the index has done so - but still remains above its 100 and 200 day averages. Although interest rates increased slightly last month, the 10-year Treasury note remains below its 50, 100, and 200 day moving averages, and the bearish (downward) crossover of the 100 and 200 day moving averages we observed in May is still present. As stated last month, this would support a bullish position in long-term treasuries. Because of weakness observed in our smallcap stock position and declining relative strength in equities overall, we have eliminated our small cap stock position and re-positioned back into long term treasuries and will hold that in addition to our existing position in emerging market stocks.

    Disclosure: The author is long EEM, TLT.

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  • khawaja waheed
    , contributor
    Comments (3) | Send Message
    it is a buying oppertunity when the market is call options on volatile stocks like ddd xone and sell them on covered calls or wait when the market turns.when buying calls ake sure it is in the money and a duration of 5 to 6 months.
    14 Aug 2014, 01:03 AM Reply Like
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