Stocks Rally on Fed Policy Shift
CNBC has revised their Option Action show which is aired every weekday night at 5:30. They have really beefed up the Friday show to the point that we think it is one of the best option oriented shows on the air. Check it out.
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Hopes for a Covid-19 treatment and positive data on a vaccine helped global markets rally to new recovery highs this week, with the S&P 500, NASDAQ and NASDAQ 100 putting in new record highs. Much better than expected earnings and economic data also gave equities a boost and the S&P 500 carried a seven-day win streak into the weekend. Adding fuel to the fire was a speech on Thursday by Fed Chair Jerome Powell at the Jackson Hole symposium. Powell promised the Federal Reserve would allow the economy to run hot on inflation and leave rates lower for longer as the Fed’s focus would be on jobs growth until the economy fully recovered from the coronavirus slowdown. Investors piled into cyclical and travel stocks as the FDA issued emergency use authorization for convalescent plasma to treat Covid-19 on Monday and gave approval for Abbott Labs (ABT) quick and inexpensive Covid-19 test later in the week. Technology stocks powered higher on blowout earnings from new Dow component salesforce.com (CRM), Workday (WDAY) and Intuit (INTU), while shares of Microsoft (MSFT), Amazon (AMZN), Facebook (FB), Alphabet (GOOGL) and NVIDIA (NVDA) all hit new record highs. Microsoft shares surged +7% after joining Walmart (WMT) on a bid for social media company TikTok. Apple Inc. (AAPL) and Tesla (TSLA) rallied ahead of their stock splits on Monday helping boost big cap tech. Home Builders were also strong and the S&P Home Builders ETF (XHB) hit another new high. The rally was broad based with every sector except Utilities (XLU) finishing in the plus column. Communication Services (XLC), Technology (XLK) and Financials (XLF) jumped more than +4% on the week, while Materials (XLB), Consumer Discretionary (XLY), Industrials (XLI) and Consumer Staples (XLP) all rose more than +2%. The rally pushed the DJIA into the plus column for the year and the S&P 500 and NASDAQ finished higher for a fifth consecutive week. The bellwether S&P 500 was on track to turn in its best August since 1986.
For the period, the DJIA gained 723.54 points (+2.6%) and closed at 28653.87. The S&P 500 added 110.85 points (+3.3%) and settled at 3508.01. The NASDAQ jumped 383.83 points (+3.4%) to 11695.63, while the small cap Russell 2000 rose 25.86 points (+1.7%) and finished at 1578.34.
Market Outlook:The technical condition of the market improved last week, but the rally left the major averages in an overbought condition. The technical indicators were in bullish ground but stochastics were in the 90’s and the 14-day RSI for the different indexes moved in the 70’s. Both these levels are unsustainable and should lead to some profit taking by traders over the near-term. The S&P 500 close out the week +13.8% above its 200-day moving average (MA) and that is the furthest this index has been stretched since the week ending January 26, 2018. The bellwether index tumbled -10% over the next two weeks, but that correction was brought on by interest rates ticking up to +3.7% as the economy heated up. Although some backing and filling is needed to work off the overbought condition, rising rates aren’t on anyone’s radar currently. The DJ Transportation Index and DJIA both recorded new recovery highs during the period with the transports outperforming the broader market which is a positive going forward. Another positive is that Technology, Communication Services, Consumer Discretionary, Consumer Staples, Materials and Healthcare sectors all hit new highs this week showing broad based participation in the economy’s recovery. Financials (XLF) had a strong week and may be finally ready to participate The Financials ETF (XLF) ran into resistance at its 200-day MA for the third time since the selloff, but keep an eye on that sector. A move above that moving average resistance level would be a big plus for the rally and bring in new buyers, pushing the major averages still higher.
Breadth improved during the week after showing negative divergence over the last two weeks. The NYSE and NASDAQ Advance/Decline lines last hit new highs on 8/12/20 and market technicians consider these to be leading indicators of market direction. This week we also saw an expansion in new 52-week highs which shows more stocks leading the rally. As the rotation into cyclical stocks continues, we should see those numbers move higher. Finally, the proprietary Market Edge Strength Indexes, which measure the percentage of stocks in the indexes that are under accumulation based on certain Up/Down Volume calculations, moved higher for a third straight week and are in Bullish ground. This shows buying is increasing as the market works higher.
Sentiment, however, shows investors remain too complacent and raises a red flag. This week Goldman Sachs released a report showing that the median S&P 500 stock short interest as a percentage of market cap at the start of August was 1.8%. That’s the lowest reading since the brokerage began tracking data in 2004 and far below the 15-year average of 2.4%. Although the market is in need of some backing and filling to work off its overbought condition, improving underlying strength in breadth should keep the market rally moving higher. Upside targets are now 30,250 for the DJIA and 3600 for the S&P 500.
A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers.
Cyclical Trend Index (CTI): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times.
Presently the CTI is Positive at +13, unchanged from the previous week. Cycles A, B, C, D and E are bullish. The CTI is projected to stay positive into September.
Momentum Index (MI): The market’s momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish.
The Momentum Index is Positive at +6, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2141 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also postive at the NASDAQ as the A/D line added 1414 units while the number of new highs beat the new lows on each day. Finally, the percentage of stocks above their 50-day moving average rose to 69.8% vs. 68.6% the previous week, while those above their 200-day moving average increased to 56.5% vs. 53.8%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the market’s Bullish or Bearish sentiment is important when attempting to determine the market’s future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. In addition, we track money flows into and out of Equity Funds and ETFs which as of 8/26/20 shows outflows of $7.8 billion. Currently, the Sentiment Index is Negative at -4, unchanged from the previous week.
Market Posture:Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 5/29/2020 (DJIA – 25383.11). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | 13 | 13 | Positive | ||||||
| Momentum Index: | 6 | 4 | Positive | ||||||
| Sentiment Index: | -4 | -4 | Negative | ||||||
| Strength Index – DJIA (DIA): | 81.8 | 51.7 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 52.1 | 38.8 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 68.1 | 52.1 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 28653.87 | 27930.33 | 2.6% | ||||||
| S&P 500 Index: | , | 3508.01 | 3397.16 | 3.3% | |||||
| NASDAQ Composite Index: | 11695.63 | 11311.80 | 3.4% | ||||||
| **Connotation is Positive or Negative Divergence from the DJIA | |||||||||
Ask Mr. Seifert
Question: What are the margin (cash) requirements for the various Optionomics’ Traders strategies?
Answer: The margin requirements for selling credit spreads which are used in all of the ‘Traders’ strategies are the same. It is the difference between the strike prices that make up the spread. A 100 – 105 call or put credit spread would have a margin requirement of $500 per spread. This would be the requirement for the Bull – Bear credit spread trades. If a ‘Traders’ strategy includes the purchase of an additional option, the total requirement would be the credit spread differential plus the debit for the additional long option premium. This would be the case in the Blow Offs and One Day Wonder Trades.
FREE Two-Week Trial Subscription
| The option ‘Trades’ and ‘Strategies’ offered by the Optionomics Group are unique in that they all have limited risk while creating great leverage. Our basic Bullish – Bearish Credit Spread Trade lets you control 100 shares of a $200 stock, a $20,000 position for less than $500 or 40:1 leverage. Your maximum risk is always limited, and our strategies produce winning trades in three out of four possible outcomes.
Optionomics let you become the casino whereby you have a mathematical edge that enables you to grind out consistent returns. These strategies are designed to produce good returns over short to intermediate-term time frames in any type of market environment. Optionomics offers a FREE Two-Week trial to its entire web site with no cost or strings attached. Each of the strategies are explained in a 5-7 page booklet and a video which includes detailed explanations and sample recommendations. During the trial, you can paper trade the various strategies and get a feel for the deal without risking a penny. Simply click on the appropriate tab on the Optionomics’ Home page to access the informative booklets and then sign up for the trail. As a special offer, you can download a FREE copy of my latest book, “Trading Options My Way”. I doubt that you have ever read anything like this. The ‘Traders’ Subscription Includes The Following: · The Bullish – Bearish Credit Spread Trade: A basic strategy to trading weekly credit spreads. · The One Day Wonder Trade: A one day trade with great consistency and upside potential. · The Blow Off Top – Bottom Trade: A lot of action and big moves too. · The Earnings Season Trade: Potential big movers with little or no downside risk. The ‘Investors’ Subscription Includes The Following: · The 21st Century Covered Call Strategy: A modern day alternative to the old-fashioned covered call strategy. · The Low Cost Put-Call Hedge Strategy: Sleep at night knowing your portfolio is protected for little or no cost. · The Billionaire Risk Reversal Strategy: Big time leverage – small time risk. Each Monday morning by 11:00 EST, the recommendations for each strategy are posted on the Optionomics’ web site. In addition, the updated results from the previous week are posted on the Optionomics’ Scoreboard. You can subscribe to either the Traders or the Investors plans at an introductory special of only $39.95 each per month on a month to month basis with no contract or strings attached. That’s $10.00 off the regular monthly subscription rate ($49.95). If you subscribe to both it is only $64.95 per month. I think you will agree that this is a super offer so give it a try. Go to www.optionomicsgroup.com and get started today doing what the pros do – “Don’t Buy Them – Sell Them” Mr. Seifert
|
Mr. Seifert