Major Averages Post New Record
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Global markets were upbeat to start the week after AstraZeneca (AZN) projected they could deliver up to 200 million doses of their Covid-19 vaccine by year’s end and Regeneron (RGEN) got FDA Emergency Use Authorization for its coronavirus treatment. Investors continued to rotate into cyclicals and reopening stocks with airlines, cruise lines, casinos and hotels also outperforming. Economic data was mostly better than expected with global steel output rising +7%, copper prices hitting the highest number since 2014 and the National Retail Federation (NRF) projecting holiday sales would be up +3.6-5.2%. Housing data also was strong as mortgage rates lingered near record lows. That pushed the DJIA higher by 782.76 points (+2.67%) over the first two-days of trading and the Dow cracked the 30,000 mark for the first time. Also boosting stocks was President Trump clearing the way for President-elect Biden to begin his transition process. Biden’s nomination of former Federal Reserve Chief Janet Yellen for Secretary-Treasurer was given a thumbs up by Wall Street and is seen as a positive for the market going forward. Crude oil prices touched March levels giving a boost to the Energy (XLE) sector, which jumped +8.6%. Financials (XLF), Consumer Discretionary (XLY), Communication Services (XLC), Materials (XLB) and Industrials (XLI) also outperformed. All of the major averages were able to trade at record highs during the week, but the market finished the week overbought by just about any measure. That could lead to some churning as we roll into December, but seasonal trends should keep an upward bias intact.
For the period, the DJIA gained 646.89 points (+2.2%) and closed at 29910.37. The S&P 500 picked up 80.81 points (+2.3%) and settled at 3638.35. The NASDAQ added 350.88 points (+3.0%) to 12205.85, while the small cap Russell 2000 outperformed and traded higher for a fourth consecutive week jumping 69.93 points (+3.9%) and finished at 1855.27.
Market Outlook: The technical condition of the market improved this week as the different indexes were able to record all-time highs. The technical indicators are positive and momentum, as measured by the 14-day RSI, is strong. The S&P 500’s +11% rally in November is the best monthly gain since April. The DJ Transportation Index and small cap Russell 2000 were both higher for a fourth straight week which is also a plus for the broader market going forward. Leadership by these two indexes points to a healthy trend in the overall market. Every sector except REITs (XLRE) finished positive showing broad participation in the market move. VIX, which is regarded as a fear index for traders, continues to inch lower and fell close to its lowest level since February finishing at 20.84. The last time the VIX traded below 20 was on February 21 before the selloff. Breadth was positive with the NYSE Advance/Decline line hitting several new all-time highs during the week and new 52-week highs is expanding showing broadening leadership. The stock market’s overbought condition, however, can’t be ignored. Almost every indicator followed is at levels that have been a precursor to some sort of correction or selloff over the near-term. Whether the market can work off this condition by trading sideways or we need to see some selling pressure remains to be seen, but as they say on Wall Street, “trees don’t grow to the sky”.
Overly bullish investor sentiment is another fly in the ointment despite the positive price action. Investors are too complacent and when everyone is already bullish, who is left to buy? When these indicators reach extreme levels, they raise a red flag for traders. If we see some back and forth trading, however, I’d expect to see investors buying the dips. Although December is traditionally one of the best months of the year for the stock market, with so many red flags waving, a cautious approach over the near term might be in order. 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. Currently, the CTI is Positive at +14, unchanged from the previous week. Cycles B, C, D and E are bullish, while Cycle A is bearish. The CTI projects a Bullish market cycle into the first of the year.
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 +4, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line jumped 3161 units while the number of new 52-week highs out did the new lows on all four days. Breadth was also positive at the NASDAQ as the A/D line added 3384 units while the number of new highs beat the new lows on each session. Finally, the percentage of stocks above their 50-day moving average increased to 83.3% vs. 81.8% the previous week, while those above their 200-day moving average rose to 87.3% vs. 83.8%. 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 11/25/20 shows inflows of $3.9 billion. Currently, the Sentiment Index is Negative at -5, 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 11/13/2020 (DJIA – 29479.81). 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): | 14 | 14 | Positive | ||||||||||||||||||||||||||||||||
| Momentum Index: | 4 | 3 | Positive | ||||||||||||||||||||||||||||||||
| Sentiment Index: | -5 | -4 | Negative | ||||||||||||||||||||||||||||||||
| Strength Index – DJIA (DIA): | 93.0 | 79.3 | Positive | ||||||||||||||||||||||||||||||||
| Strength Index – NASDAQ 100 (QQQ): | 84.0 | 77.1 | Positive | ||||||||||||||||||||||||||||||||
| Strength Index – S&P 100 (OEX): | 89.2 | 82.8 | Positive | ||||||||||||||||||||||||||||||||
| Dow Jones Industrial Average (DJIA): | 29910.37 | 29263.48 | 2.2% | ||||||||||||||||||||||||||||||||
| S&P 500 Index: | , | 3638.35 | 3557.54 | 2.3% | |||||||||||||||||||||||||||||||
| NASDAQ Composite Index: | 12205.85 | 11854.97 | 3.0% | ||||||||||||||||||||||||||||||||
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Ask Mr. Seifert
Question: How do I figure profit and losses in the credit spread part of the trade when I do 21st Century Covered Calls and Low Cost Covered Put transactions?
This sounds confusing but it is a simple calculation. A spread loss occurs when the stock closes above either the short call (21st Century Calls) or below the short put (Put Hedge Trades). In both cases, the loss will never be more than the difference between the strike prices less the credit received when initiating the trade. The loss is offset by the move in the stock.
21st Century Covered Calls Credit Spread Losses: If a stock closes above the short call option strike price, the loss is the difference between Friday’s close and the short call option strike price but no more than the long call option strike price less the credit received when initiating the spread. If the stock closes above the long call option, the loss is the difference between the two strike prices less the credit received when initiating the spread.
Low Cost Bullish Put Hedge Credit Spread Losses: If a stock closes below its short put option strike price, but above the long put strike price, the loss is the difference between Friday’s close and the short put option strike price but no more than the long put option strike price less the credit received when initiating the spread. If the stock closes below the long put option strike, the loss is the difference between the two strike prices less the credit received when initiating the spread.
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