Stocks Slip On Virus Concerns
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
| Better than expected Q4 earnings from Money Center banks helped to kick off a rally this week that saw the major averages turn in their best weekly percentage move since early September. The DJIA rode a five-day win streak into the weekend on a broad-based move that left only the Energy (XLE) sector in the dust. Economic data was mixed leaving interest rates little changed, while gold prices firmed. Utilities (XLU) and REITs (XLRE) were the top performing sectors followed by Technology (XLK), Materials (XLB) and Communication Services (XLC). Gains in big cap technology names and the FANG stocks outpaced the broader market. The signing of a ‘Phase 1’ trade deal between the US and China, coupled with the Federal Reserve’s $50 billion intervention in the overnight repo market, another form of quantitative easing, also fueled the market’s rally. The major averages closed out the week at record highs with the Dow a chip shot from 30,000 as investors looked forward to a slew of earnings reports in the coming weeks. For the period, the DJIA jumped 524.33 points (+1.8%) led by Pfizer (PFE), Visa (V), Cisco Systems (CSCO) and Goldman Sachs (GS) and settled at 29348.10. The S&P 500 gained 64.27 points (+2.0%) ending at 3329.62. The NASDAQ traded higher for a sixth consecutive week adding 210.08 points (+2.3%), finishing at 9388.94. The small cap Russell 2000 outperformed and snapped a three-week losing streak surging 42.00 points (+2.5%) and closed at 1699.64.
Market Outlook:The technical condition of the market remained bullish this week and every minor dip continues to be bought. The DJIA, S&P 500, NYSE, NASDAQ, NASDAQ 100 and DJ Utility Index all recorded new record highs. Erasing what had been viewed as negative divergence was the outperformance of the DJ Transportation Index and small cap Russell 2000 which hit new 52-week highs but remained just below their record highs from September 2018. The technical indicators are bullish, momentum is strong, but as has been the case, the different indexes finished the period overbought by several measures. Internal breadth is positive and the NYSE Advance/Decline line, a leading indicator of market direction, punched new highs throughout. There was also big improvement in the NASDAQ Advance/Decline line which had lagged, showing more participation in the NASDAQ’s run. New 52-week highs on the NYSE and NASDAQ continued to expand which is also bullish for the rally. Sentiment, however, continues to show that investors are too bullish and complacent. 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 Negative at -3, unchanged from the previous week. The counts for Cycles A, C and D are bullish while the counts for Cycles B and E are bearish. The CTI is expected to remain in negative ground until the second week of February. 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 +5, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 3260 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also positive at the NASDAQ as the A/D line gained 2628 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 jumped to 76.6% vs. 68.3% the previous week, while those above their 200-day moving average increased to 74.6% vs. 70.5%. Readings above 70.0% denote an overbought condition, while below 20% is bullish. Market Posture Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bearish as of the week ending 1/03/2020 (DJIA – 28634.88). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
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| Market Timing Models | Current Reading | Prior Week | Connotation | |||||||
| Cyclical Trend Index (CTI): | -3 | -3 | Negative | |||||||
| Momentum Index: | 3 | 5 | Neutral | |||||||
| Sentiment Index: | -5 | -5 | Negative | |||||||
| Strength Index – DJIA (DIA): | 46.7 | 43.3 | Negative | |||||||
| Strength Index – NASDAQ 100 (QQQ): | 58.2 | 51.0 | Positive | |||||||
| Strength Index – S&P 100 (OEX): | 55.7 | 41.2 | Positive | |||||||
| Dow Jones Industrial Average (DJIA): | 28989.73 | 29348.10 | -1.2% | |||||||
| S&P 500 Index: | , | 3295.47 | 3329.62 | -1.0% | ||||||
| NASDAQ Composite Index: | 9314.91 | 9388.94 | -0.8% | |||||||
| **Connotation is Positive or Negative Divergence from the DJIA | ||||||||||
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Why do I lose money when I buy cheap puts and calls and I am right on my market direction call?
I am asked this question all the time. You are sure that Goldman Sachs (GS) is going to report earnings/revenues and you feel that the stock is going to rally. You decide that the best leverage is to buy out of the out of the money calls. They are cheap, only $0.50 cents and you think you will at least double your money. Right? Wrong! First, there are no cheap out of the money puts and calls. They are priced off the current At The Money Straddle and all market participants are aware of their value. Remember that for every option trade there must be a buyer for every seller and vice versa. So, when you buy that $0.20 delta cheap call you must be right in two ways. The price must go in your direction and it must be greater than premium you paid for the option’s strike price. The number comes out and you were right GS rallies $15 but your $0.20 call actually goes down in value! You are shocked and blame everyone but yourself. Here is what you need to do. First learn how the option model works. Second use strategies that will protect you when your price direction is correct. I can assure you that it is not buying cheap calls. Stop playing a game that you can’t win and learn how to use options to enhance your winners not take them away. I think that you will agree that nothing in trading or investing is more frustrating than being right in the market only to lose your money
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