Bull Or Bear Market?
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Investors that were waiting for a leveling off in the number of new Covid-19 cases got what they were waiting for this week and plowed back into equities. Buying was across the board with every sector sharply higher. A +20% spike in REITs (XLRE) led the charge followed by double digit moves in Materials (XLB), Financials (XLF), Energy (XLE), Consumer Discretionary (XLY). Utilities (XLU) and Industrials (XLI). The major averages were also up double-digits with the small cap Russell 2000 spiking +17.8%, turning in one of its biggest weekly gains ever. However, the rally wasn’t without its gut-wrenching moments. After the DJIA jumped 1627.46 points (+7.73%) on Monday, investors saw a 937-point surge on Tuesday disappear by the end of the day leaving the major averages in the red. Stocks rallied again on Wednesday as crude oil prices soared after Russia and OPEC agreed to production cuts, and Healthcare (XLV) traded higher after Bernie Sanders withdrew from the Democratic nominee race. A worse than expected 6.6 million new jobless claims on Thursday had traders ready to push the ‘sell’ button, but a surprise $2.3 trillion program announced by the Federal Reserve to support the economy before the market opened brought another wave of buyers in off the sidelines. In announcing the move, Fed Chair Jerome Powell promised the Federal Reserve would act “forcefully, proactively and aggressively” until the Fed was “confident we’re on the road to recovery.” Powell also said the rebound in the economy would be robust and the Fed would use all its tools to build a bridge “from crisis to growth.” Thursday’s gain snapped an 11-week string of selling ahead of the weekend and the major averages had retraced 50% of the selloff from the highs to the 3/23/20 low as the period ended.
For the period, the DJIA surged 2666.84 points (+12.7%) and closed at 23719.37. The S&P 500 gained 301.17 points (+12.1%) to finish at 2789.82. The NASDAQ jumped 780.50 points (+10.6%) and finished at 8153.58, while the small cap Russell 2000 outperformed soaring 194.68 points (+18.5%) and closed at 1246.73.
Market Outlook:The technical condition of the market was much improved last week as the major averages had rallied more than +25% off the March 23, closing low. The technical indicators also improved with Momentum, as measured by the 14-day RSI bullish and MACD Histograms, which signal short term trends, in bullish ground for the different indexes. We also saw the DJ Transportation Index and small cap Russell 2000, which market participants would like to see lead the broader market, outperform. That bodes well for the market going forward. However, the Philadelphia Semiconductor Index (SOX), which has also led the rally, failed to hold above its 200-day MA after struggling with that resistance level during the week. As mentioned, every sector was positive and Technology (XLK) and Healthcare (XLV) finished the week back above their 200-day moving average (MA) with Healthcare also clearing its 50-day MA. Utilities (XLU) and REITs (XLRE) stalled at their respective 200-day MA. The rally was also confirmed by bullish breadth. The NYSE and NASDAQ Advance/Decline lines both expanded sharply, and we saw new 52-week highs finally once again outnumber new lows as the week ended. Finally, our proprietary Strength Indexes have moved higher for a fourth straight week which shows strong underlying accumulation for the current rally. That indicates we could see higher to sideways action in the major averages for another few weeks and perhaps a move up to the 200-day moving average before we see the current rally for the major averages stall out.
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 +3. The CTI was reset as of the week ending 4/03/20 after it appears that the bottom for this cycle was 3/23/20. Cycles A, B and D are bullish, while cycles C and E are Bearish. However, the CTI is projected to return to a negative count the week ending 5/01/20 and remain negative into August which still leaves open a possible retest of the March 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 +0, up four notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 8328 units while the number of new 52-week lows out did the new highs on three of the five days. Breadth was also mixed at the NASDAQ as the A/D line jumped 6738 units while the number of new lows beat the new highs on four days. Finally, the percentage of stocks above their 50-day moving average rose to 11.8% vs. 6.8% the previous week, while those above their 200-day moving average increased to 12.1% vs. 8.0%. 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 4/01/20 shows inflows of $3.9 billion. Currently, the Sentiment Index is Positive at +6, down a notch 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 4/09/2020 (DJIA – 23719.37). 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): | 3 | 1 | Positive | ||||||
| Momentum Index: | 0 | -3 | Neutral | ||||||
| Sentiment Index: | 6 | 7 | Positive | ||||||
| Strength Index – DJIA (DIA): | 65.5 | 53.3 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 55.1 | 44.9 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 57.9 | 47.4 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 23719.37 | 21052.53 | 12.7% | ||||||
| S&P 500 Index: | , | 2789.82 | 2488.65 | 12.1% | |||||
| NASDAQ Composite Index: | 8153.58 | 7373.08 | 10.6% | ||||||
| **Connotation is Positive or Negative Divergence from the DJIA | |||||||||
Ask Mr. Seifert
Q: How did the selections for the various ‘Investors’ strategies perform during the most recent market selloff?
A: The algorithms used by Optionomics in making the ‘Investors’ selections are provided by Market Edge and have a good record of identifying both Long and Short-Sale candidates. The Market Edge ‘Opinions’ (Long, Neutral and Avoid) have a history dating back to 1998 of correctly forecasting the intermediate-term direction of stocks with better than 70% accuracy.
The market as measured by the DJIA topped out in February 2020 in the 29000 area and proceeded to drop to around 18500 by mid-March 2020, a 36% decline. During that time frame, Optionomics generated only five new selections out of a potential of thirty open positions:
- The 21st Century Covered Calls Strategy (1): WMT on 02/24/20 – closed on 03/06/20 (-2.1%).
- The Low Cost Put Hedge Strategy (2): WMT on 02/24/20 – closed on 03/06/20 (-2.1%) and DE on 03/09/20 – Closed on 03/20/20 (-11.8%)
- The Billionaire Risk Reversal Strategy (2): IBM on 02/10/20 – closed on 02/28/20 (-14.9%) and AGN on 02/24/20 – closed on 03/06/20 (-7.2%)
As can be seen, the Market Edge selection method resulted in a very few selections which kept Optionomics’ subscribers on the sidelines for most of the worse market declines in history.
‘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: | 04/10/20 | 2789.82 | S&P 500: | 04/10/20 | 2789.82 | ||
| S&P 500 Points Gain/Loss: | 304.08 | S&P 500 Points Gain/Loss: | 198.72 | ||||
| S&P 500 % Gain/Loss: | 12.2% | S&P 500 % Gain/Loss: | 7.7% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $6,215 | Optionomics Covered Call $ P/L: | $28,066 | ||||
| Optionomics Traders % P/L: | 31.1% | Optionomics Covered Call % P/L: | 28.1% | ||||
| Last Week’s Traders % P/L: | -3.6% | Last Week’s Covered Calls % P/L: | 0.0% | ||||
| 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: | 04/10/20 | 2789.82 | S&P 500: | 04/10/20 | 2789.82 | ||
| S&P 500 Points Gain/Loss: | -83.05 | S&P 500 Points Gain/Loss: | -117.59 | ||||
| S&P 500 % Gain/Loss: | -2.9% | S&P 500 % Gain/Loss: | -4.0% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $7,452 | Optionomics Billionaire Trade $ P/L: | $4,539 | ||||
| Optionomics Put-Call Hedge % P/L: | 7.5% | Optionomics Billionaire Trade % P/L: | 190.6% | ||||
| Last Week’s Put-Call Hedge % P/L: | 0.0% | Last Week’s Billionaire Trade % P/L: | 0.0% | ||||
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