Major Averages Higher on Stimulus Hopes
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages firmed this week after an awful September and the DJIA and S&P 500 snapped their four-week losing streak. Market action remained volatile however, as equities reacted daily to on again, off again coronavirus stimulus reports. Economic data was mostly better than expected, but job losses remained elevated. The different indexes muscled higher during the week on hopes that Congress would come to terms on a stimulus package, but the wheels almost came off the bus on Friday. President Trump and the first lady Melania tested positive for Covid-19 and the Dow dropped 400-points at the bell before battling back to the flat line in the afternoon. Bringing the market off the lows came down to an ‘imminent’ airline relief package and word that Congress was likely to pass a $2 trillion stimulus package over the weekend. The market gains were across the board with Energy (XLE) the only sector trading down as crude oil prices continued to slip lower on oversupply issues and fears that global economies were in danger of slowing and facing additional shutdowns. REITs (XLRE), Financials (XLF), Utilities (XLU) and Consumer Discretionary (XLY) outperformed to boost prices. The major averages closed mixed on Friday, but the week was highlighted by outperformance in the small cap Russell 2000, which helped lead the different indexes to a positive start to October.
For the period, the DJIA jumped 508.85 points (+1.9%) and closed at 27682.81. The S&P 500 added 50.04 points (+1.5%) and settled at 3348.42. The NASDAQ gained 161.46 points (+1.5%) to 11075.02, while the small cap Russell 2000 surged 64.39 points (+4.4%) and finished at 1539.30.
Market Outlook: The technical condition of the market improved last week as all the major averages finished in the plus column for the first time since the last week of August. The different indexes are also trading back above their respective 50-day moving average (MA). The technical indicators moved to neutral to positive and are rising. MACD, a short-term trend indicator, crossed into bullish ground for most of the indexes. After lagging the broader market, the small cap Russell 2000 moved to the forefront jumping +4.4% which bodes well for the broader market going forward. The Philly Semiconductor Index (SOX) also outperformed and was closing in its all-time high after gaining +2.0% on the week. Most of the sector ETFs are trading above their 50-day MA which is also a plus for the market after only Utilities (XLU) managed to escape September with a gain. Currently only Communication Services (XLC), Healthcare (XLV) and Financials (XLF) are still struggling to clear that resistance level. Energy (XLE) remains the laggard but found some buying on Friday off oversold levels.
Internal breadth was mostly positive after deteriorating the last few weeks. The NYSE Advance/Declines moved higher, but this leading indicator of market direction is still showing negative divergence having last made a new high mid-August. The NASDAQ A/D line was about flat for the period. New 52-week highs expanded slightly during the period but are well below that of a market on the verge of new highs. This negative divergence is indicative of a market that is most likely range bound and I expect the major averages to trade in a range ahead of the election. Investor sentiment is neutral.
The market was oversold after four-weeks of losses and the different indexes were able to rebound this week. The S&P Short Range Oscillator fell to its lowest reading since the March sell off last week and historically those numbers have been able to call short term market bottoms. Support areas were tested and held this week, which brought buyers in off the sidelines, but at this stage further upside gains are going to be reliant on additional stimulus. With the election only weeks away look for the major averages to remain in a trading range. That would keep the DJIA trading between 26,300 and 29,000, while the S&P 500 should move between 3200 and 3550. The NASDAQ is likely to trade between 10500 and 11750.
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 +5, down two notches from the previous week. Cycles A, B, D and E are bullish, while Cycle C is bearish. The CTI is projected to move into negative ground during October.
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 +7, up three notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 3427 units while the number of new 52-week highs out did the new lows on all five days. Breadth was mixed at the NASDAQ as the A/D line eased 748 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 39.7% vs. 20.8% the previous week, while those above their 200-day moving average increased to 52.8% vs. 43.9%. 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 9/30/20 shows outflows of $32 million. Currently, the Sentiment Index is Neutral at +2, up 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 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): | 5 | 7 | Positive | ||||||
| Momentum Index: | 7 | 4 | Positive | ||||||
| Sentiment Index: | 2 | 1 | Neutral | ||||||
| Strength Index – DJIA (DIA): | 20.7 | 17.2 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 28.6 | 24.5 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 17.0 | 18.1 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 27682.81 | 27173.96 | 1.9% | ||||||
| S&P 500 Index: | , | 3348.42 | 3298.46 | 1.5% | |||||
| NASDAQ Composite Index: | 11075.02 | 10913.56 | 1.5% | ||||||
| **Connotation is Positive or Negative Divergence from the DJIA | ||||||||
Ask Mr. Seifert
Question: What is meant by ‘Rolling Up’ an option position?
Rolling Up is when you close an existing options position and simultaneously open up a similar position, but using options with a higher strike price. You are effectively rolling the option up to a higher strike price, hence the term. You can do this with a long or a short position, and the process is really quite simply.
You would use the sell to close order to close your position if you were long options, or you would use the buy to close order if you were short. At the same time, you open a new position, using either the buy to open order for the long position or the sell to open order for the short position, on contracts for the same underlying security but with a higher strike price.
The process is exactly the same whether it involves calls or puts, but the effect is different. When rolling up calls you will be swapping your existing position for one involving cheaper contracts. The higher the strike price of the calls the cheaper they are. If you are rolling up puts, then you will be swapping your existing position for one involving more expensive contracts, because the higher the strike price of puts, the more expensive they are. Of course, the effect also depends on whether you are long or short.
Rolling up a long call position means a net cash gain, because you will be selling one position and buying a cheaper one. However, if you are rolling up a short call position, then you will have to pay more for the contracts you are buying back than you will receive for writing the new contracts at the higher strike price.
On other hand, rolling up a long put position means selling the cheaper contracts that make up your existing position and buying more expensive ones. Whereas rolling up a short put position means closing your position by buying back the cheaper contracts and then writing more expensive ones. However, it’s not very often that you would roll up long puts.
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