Stocks Surge As States Reopen
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Stocks jumped on the bus and rode it back to work this week as global markets surged on the reopening of economies and further stimulus from Central Banks. Investors shrugged off trade tensions, social unrest and lingering coronavirus cases and focused on improving economic data. The kicker came on Friday when May payrolls showed an increase of +2.5 million while analysts were expecting a loss of -7 million+. The DJIA extended its daily win streak to five spiking more than 1000-points after the report was released on Friday. The DJ Transportation Index soared +10.1% with airlines leading the rally led by a +51% flight in United Airlines (UAL). The ‘risk on’ rotation saw stunning gains in Energy (XLE +15.69%), Financials (XLF +12.13%) and Industrials (XLI +10.55%). Healthcare (XLV) finished the period flat. Some of the oil stocks jumped more than 50% during the week, while a 43% surge in shares of Boeing (BA) led Industrials. Global markets rallied earlier in the week on new stimulus packages from Europe and Japan and Germany’s DAX jumped +10.88%, France’s CAC rose +10.71% and Japan’s Nikkei +4.5%. The major averages were all back above their 200-day moving average (MA) as the period ended and while almost painfully overbought, had their sights set on all-time highs after their best percentage performance since coming off the March lows.
For the period, the DJIA traded sharply higher for a third consecutive week soaring 1727.87 points (+6.8%) to 27110.98. The S&P 500 added 149.62 points (+4.9%) and finished at 3193.93. The NASDAQ picked up 324.21 points (+3.4%) and finished at 9814.08, while the small cap Russell 2000 outperformed jumping 113.11 points (+8.1%) to close at 1507.15.
Market Outlook:The technical condition of the market improved last week with every index hitting a new recovery high, and the NASDAQ 100 and Philadelphia Semiconductor Index (SOX) hitting record highs,and the NASDAQ hitting a new intraday high on Friday. The technical indicators are all in bullish ground but overbought, while momentum remains strong. Every sector except Energy (XLE) and Financials (XLF), despite their recent outperformance, is back above its respective 200-day MA which shows broad participation in the market. In addition, Technology (XLK), Consumer Discretionary (XLY), Healthcare (XLV) and Materials (XLB) are at or near all-time highs. Although we saw slowing momentum in some of the leading groups, such as the FANG names and other big cap technology names, the surge in the DJ Transportation Index and small cap Russell 2000 has more than made up for the rotation out of big cap tech into ‘risk on’ stocks. Technicians would prefer to see these indexes lead market rallies in a bull market. Breadth continues to improve and the NYSE Advance/Decline line, a leading indicator of market direction, finished the week at an all-time high which supports higher market prices going forward. The only fly in the ointment is the number of new 52-week highs which has remained stubbornly low. Even with Friday’s spike in the market new highs barely registered triple-digits on the NASDAQ and only hit 64 on the NYSE. As the major averages close in on record highs, we need to see those numbers expanding. As mentioned, the last few weeks there remains little to indicate that the rally has run its course. However, the stock market finished the week extremely overbought which could lead to some backing and filling over the near term. With Central Banks propping up stock markets and economies, look for minor pullbacks to be bought and record highs to be hit sooner than later as the V-shape recovery bus rolls on.
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 +11, unchanged from the previous week. The CTI was reset as of the week ending 4/03/20 and the bottom for the cycles was 3/23/20 indicating that a new bull market began on that date. Cycles A, B, C, D and E are bullish, while none of the cycles are bearish at this time. The CTI is projected to remain bullish into July.
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, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 7038 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 4635 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 increased to 90.3% vs. 89.4% the previous week, while those above their 200-day moving average rose to 38.5% vs. 32.5%. 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 6/03/20 shows outflows of $4.6 billion. Currently, the Sentiment Index is Negative at -2, down two notches 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): | 11 | 11 | Positive | ||||||||||
| Momentum Index: | 3 | 3 | Neutral | ||||||||||
| Sentiment Index: | -2 | 0 | Negative | ||||||||||
| Strength Index – DJIA (DIA): | 82.3 | 79.3 | Positive | ||||||||||
| Strength Index – NASDAQ 100 (QQQ): | 86.4 | 84.7 | Positive | ||||||||||
| Strength Index – S&P 100 (OEX): | 86.0 | 83.0 | Positive | ||||||||||
| Dow Jones Industrial Average (DJIA): | 27110.98 | 25383.11 | 6.8% | ||||||||||
| S&P 500 Index: | , | 3193.93 | 3044.31 | 4.9% | |||||||||
| NASDAQ Composite Index: | 9814.08 | 9489.87 | 3.4% | ||||||||||
| **Connotation is Positive or Negative Divergence from the DJIA | |||||||||||||
Ask Mr. Seifert
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.
‘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: | 06/05/20 | 3193.90 | S&P 500: | 06/05/20 | 3193.90 | ||||
| S&P 500 Points Gain/Loss: | 708.16 | S&P 500 Points Gain/Loss: | 602.80 | ||||||
| S&P 500 % Gain/Loss: | 28.5% | S&P 500 % Gain/Loss: | 23.3% | ||||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||||
| Optionomics Traders $ P/L: | $3,734 | Optionomics Covered Call $ P/L: | $33,040 | ||||||
| Optionomics Traders % P/L: | 18.7% | Optionomics Covered Call % P/L: | 33.0% | ||||||
| Last Week’s Traders % P/L: | 1.0% | Last Week’s Covered Calls % P/L: | 2.6% | ||||||
| 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: | 06/05/20 | 3193.90 | S&P 500: | 06/05/20 | 3193.90 | ||||
| S&P 500 Points Gain/Loss: | 321.03 | S&P 500 Points Gain/Loss: | 286.49 | ||||||
| S&P 500 % Gain/Loss: | 11.2% | S&P 500 % Gain/Loss: | 9.9% | ||||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||||
| Optionomics Put-Call Hedge $ P/L: | $23,692 | Optionomics Billionaire Trade $ P/L: | $6,034 | ||||||
| Optionomics Put-Call Hedge % P/L: | 23.7% | Optionomics Billionaire Trade % P/L: | 313.8% | ||||||
| Last Week’s Put-Call Hedge % P/L: | 11.7% | Last Week’s Billionaire Trade % P/L: | 51.1% | ||||||
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