Central Banks Corral Selloff
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A volatile week saw daily thousand-point swings in the DJIA as investors reacted to a surprise rate cut by the Federal Reserve, a strong Super Tuesday showing for Joe Biden and more spreading in the Coronavirus outbreak. The Dow turned in its biggest one-day point gain in history on Monday as Central Banks prepared to throw global markets a lifeline to counter the effects of the virus. The blue-chip index surged 1293.96 points (+5.09%) finishing at 26703.32. Investors were whipsawed on Tuesday after a spike in the major averages on a surprise 50bps cut in interest rates by the Federal Reserve was sold sending the different indexes sharply lower by the close. Healthcare stocks led a rebound on Wednesday after Democratic candidate Joe Biden’s Super Tuesday victory, but falling yields and California declaring a state of emergency after more cases of the virus were discovered, sent stocks lower again to finish the week. The DJ Transportation Index and Russell 2000 traded below the previous week’s lows as airline’s, cruise lines and travel related stocks went on sale, and small caps sold off on slowing growth concerns and both hit new 52-week lows. Crude oil prices dropped after Russia balked at cutting production and the Energy (XLE) sector was the weakest market group falling -6.12%. Financials (XLF) were pummeled by record low yields as the 10-year Treasury dipped as low as .68% on Friday. Communication Services (XLC) and Consumer Discretionary (XLY) also suffered heavy losses. Defensive sectors Utilities (XLU), Consumer Staples (XLP) and REITs (XLRE) outperformed along with Healthcare (XLV). The major averages finished the week mostly higher and like the previous Friday, buying came in the last hour on hopes that perhaps the worst of the virus was over. That indicates that investors can count on another volatile week ahead as headlines on the Coronavirus dictates trading, but a tradeable bottom could be right around the corner.
For the period, the DJIA snapped a two-week losing streak picking up 455.42 points (+1.8%) and closed at 25864.78. The S&P 500 gained 18.15 points (+0.6%) to finish at 2972.37. The NASDAQ added 8.25 points (+0.1%) and finished at 8575.62, while the small cap Russell 2000 showed negative divergence losing 27.21 points (-1.8%) and closed at 1449.22. The DJ Transportation Index dropped 432.13 points (-4.6%) to 8956.06.
Market Outlook:The technical condition of the market continued to deteriorate as the major averages saw a rally attempt mid-week fizzle out before finishing near the lows of the week. The technical indicators remained in bearish ground. Fibonacci retracement levels came into play for the major averages however, which defined support and resistance areas that can be used by investors as areas to buy and sell swings in the market. Starting with the S&P 500, last week’s selloff found support after retracing 50% of the rally off the December 2018 low around 2870. The index then retraced 50% of the recent move down before the bounce stalled at 3125. That opened the door for a retest of last Friday’s low around 2850-2885 where investors may want to consider adding to positions. Traders could use a dead cat bounce to 3125 to take profits helping to make a little more sense of the markets volatile swings. The NASDAQ, which has outperformed the broader market, retraced a little more than 38.2% of the advance off the 12/24/18 low. It also retraced 50% of the recent decline this week but was turned back at that midpoint and finished the period flat but found support at its 200-day moving average. If we see more selling next week, a 50% retracement of the previous rally would target the 8,000 area for the NASDAQ and be another level where investors could move back into the market.
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 +1, after being adjusted from the previous week. The counts for Cycles A, B, C and D are bullish while the count for Cycle E is bearish. The CTI is projected to jump to a +7 as early as next week providing the DJIA holds above this week’s low.
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 Neutral at -3, down six notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 1102 units while the number of new 52-week lows out did the new highs on all five days. Breadth was also negative at the NASDAQ as the A/D line dropped 2039 units while the number of new lows beat the new highs on each day. Finally, the percentage of stocks above their 50-day moving average rose to 15.8% vs. 10.7% the previous week, while those above their 200-day moving average increased to 31.0% vs. 66.3%. 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 3/04/20 shows outflows of $20.3 billion. Currently, the Sentiment Index is Positive at +3, unchanged from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Neutral as of the week ending 2/28/2020 (DJIA – 25409.36). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
Industry Group Rankings : What’s Hot (6) – What’s Not (85). Of the 91 Industry Groups that we track, 6 are rated as either Strong or Improving while 85 are regarded as Weak or Deteriorating. The previous week’s totals were 16-75. The following are the strongest and weakest groups for the period ending 3/05/20. Strongest: Semiconductors & Related, Precious Metals, Internet-Retail and Home Construction. Weakest: Oilfield-Equipment, Airlines, Coal and Oil-Secondary. To review all of the Industry Group Rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 3/05/20 were: Sector-Utilities (+6.44%), Commodity-Precious Metals (+5.82%), Sector-Real Estate (+5.21%), Sector-Healthcare (+4.42%) and Sector-Alternative Energy (+4.11%). The weakest categories were: Sector-Energy (-2.76%), Shorts (-2.05%), Value-Small Cap (-1.20%), Sector-Consumer Discretionary (-0.91%) and Sector-Industrial (-0.86%). To review all the categories in the Market Edge universe, click on the ETFs tab.
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | 1 | 1 | Positive | ||||||
| Momentum Index: | -3 | 3 | Neutral | ||||||
| Sentiment Index: | 3 | 3 | Positive | ||||||
| Strength Index – DJIA (DIA): | 1.0 | 6.8 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 14.3 | 17.4 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 6.2 | 13.6 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 25864.78 | 25409.36 | 1.8% | ||||||
| S&P 500 Index: | , | 2972.37 | 2954.22 | 0.6% | |||||
| NASDAQ Composite Index: | 8575.62 | 8567.37 | 0.1% | ||||||
Ask Mr. Seifert
Question: You list the various Traders selections every week with the assumption that one spread for each position should be initiated. Since the maximum risk for the various strategies can be different, shouldn’t the number of spreads vary?
Answer: The win percentage for all of the ‘Traders’ strategies averages around 61%. The main difference between the strategies is the maximum dollar risk per spread. Blow Offs can have a maximum risk of let’s say $520 while a Bearish or Bullish Vertical Credit Spread may only have a maximum risk of only $130. The number of spreads that you position is up to you. Our published results are based on one spread per play. If you would like to balance things out, a good tactic would be to commit the same amount of risk capital per play. In the above example that would equate to one Blow Off trade ($520) and four Bearish Vertical Credit spreads ($520 = $130 x 4).
‘Traders’ And ‘Investors’ Results
| ‘Traders’ Results | 21st Century Covered Call Results | ||||||
| Performance Since Week Ending 1/04/19 | Performance Since Week Ending 11/06/17 | ||||||
| S&P 500: | 01/04/19 | 2485.74 | S&P 500: | 11/06/17 | 2591.10 | ||
| S&P 500: | 03/06/20 | 2972.37 | S&P 500: | 03/06/20 | 2972.37 | ||
| S&P 500 Points Gain/Loss: | 486.63 | S&P 500 Points Gain/Loss: | 381.27 | ||||
| S&P 500 % Gain/Loss: | 19.6% | S&P 500 % Gain/Loss: | 14.7% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $8,096 | Optionomics Covered Call $ P/L: | $28,291 | ||||
| Optionomics Traders % P/L: | 40.5% | Optionomics Covered Call % P/L: | 28.3% | ||||
| Last Week’s Traders % P/L: | -1.5% | Last Week’s Covered Calls % P/L: | 0.9% | ||||
| Put-Call Hedge Results | The Billionaire Risk Reversal Results | ||||||
| Performance Since Week Ending 1/26/18 | Performance Since Week Ending 04/12/19 | ||||||
| S&P 500: | 01/26/18 | 2872.87 | S&P 500: | 04/12/19 | 2907.41 | ||
| S&P 500: | 03/06/20 | 2972.37 | S&P 500: | 03/06/20 | 2972.37 | ||
| S&P 500 Points Gain/Loss: | 99.50 | S&P 500 Points Gain/Loss: | 64.96 | ||||
| S&P 500 % Gain/Loss: | 3.5% | S&P 500 % Gain/Loss: | 2.2% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $9,293 | Optionomics Billionaire Trade $ P/L: | $4,638 | ||||
| Optionomics Put-Call Hedge % P/L: | 9.3% | Optionomics Billionaire Trade % P/L: | 194.8% | ||||
| Last Week’s Put-Call Hedge % P/L: | 1.3% | Last Week’s Billionaire Trade % P/L: | 8.8% | ||||
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