Mr. Seifert Sez For The Week Of 12-14-20

by | Dec 13, 2020 | Mr. Seifert Sez

Wall Street Wobbles As Stimulus Talks Stall

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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 finished with marginal losses this week as investors balanced the roll out of Pfizer’s Covid-19 vaccine with stalled stimulus talks. Choppy trading saw several of the different indexes touch record highs, but weaker jobs data pointed to slowing growth and amplified the need for another relief package before year end. A weak US Dollar gave a boost to commodities and the price of crude oil hit its highest level since March on global growth optimism in the coming year. Copper prices rose to a seven-year high on strong demand from China. The yield on the 10-year Treasury flirted with 1% early in the week but backed off as the period ended to +0.88%. Every sector except Energy (XLE) finished in the red with REITs (XLRE), Technology (XLK), Financials (XLF) and Materials (XLB) the biggest laggards. Investors got caught up in IPO fever with Door Dash (DASH), AirBNB (ABNB) and C3.ai (AI) debuting with share prices soaring 100% and more, bringing back nightmares of the dot.com era. On Friday, the major averages continued to consolidate some of the gains going back to November as the stock market worked off its overbought condition. That snapped a two-week win streak and left investors hoping that Congress might help deliver a ‘Santa’ rally as 2020 begins to wind down.

For the period, the DJIA slipped 171.89 points (-0.6%) and closed at 30046.37. The S&P 500 lost 35.66 points (-1.0%) and settled at 3663.46. The NASDAQ snapped a three-week win streak sliding 86.36 points (-0.7%) to 12377.87, while the small cap Russell 2000 advanced for a sixth straight week gaining 19.25 points (+1.0%) and finished at 1911.70.

Market Outlook: The technical condition of the market was little changed this week. Despite hitting new highs, the major averages finished the period mostly lower on stimulus woes. The technical indicators were mixed with MACD ST, which gauges the short-term trend, bearish for the different indexes, while Momentum, as measured by the 14-day RSI, positive, but slowing. Rotation into small caps and cyclicals and out of big cap tech shares remains in place as the Russell 2000 outperformed the broader market finishing higher for a sixth straight week. On a technical basis the different indexes continue to be overbought which could lead to continued weakness over the next week. Underlying breadth was positive, showing the major averages are still under accumulation and the NYSE Advance/Decline line, a leading indicator of market direction, hit several all-time highs during the week. New 52-week highs expanded which shows broadening leadership in the market and that also bodes well for future gains. Sentiment, however, remains overly bullish with several indicators still at extreme readings and is a red flag as investors may be too complacent about rising prices.

I have been talking about the market being overbought over the last few weeks and we saw some welcomed consolidation this week. Without a relief package however, it is likely that we could still see some backing and filling in the market. Slowing momentum also hints that we could see the rally pause here, but I would still look for a move higher as the month ends. That is the traditional time for a ‘Santa’ rally and if you’ve ever wondered why, there are several reasons. Much of it has to do with ‘window dressing’ by portfolio managers who want to own the most popular stocks before the end of the year performance report goes out to investors. Another reason is that many mutual funds and ETFs see an influx of money coming in from end of year bonuses and retirement plan contributions, thus the propensity for stocks to get a lift during this period. We may see higher volatility next week as stimulus headlines dictate market swings, but I would look for dips to be bought.

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 +12, down two notches 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 +5, down a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 105 units while the number of new 52-week highs out did the new lows on all five days. Breadth was mostly positive at the NASDAQ as the A/D line slid 15 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 eased to 81.7% vs. 82.8% the previous week, while those above their 200-day moving average rose to 89.8% vs. 87.9%. 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 12/09/20 shows outflows of $5.4 billion. Currently, the Sentiment Index is Negative at -5, unchanged 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):     12   14   Positive
Momentum Index:     5   6   Positive
Sentiment Index:   -5   -5   Negative
Strength Index – DJIA (DIA):     48.3   72.4   Negative
Strength Index – NASDAQ 100 (QQQ):     47.9   70.8   Negative
Strength Index – S&P 100 (OEX):     45.2   71.0   Negative
             
Dow Jones Industrial Average (DJIA):   30046.37 30218.26   -0.6%
S&P 500 Index: , 3663.46   3699.12   -1.0%
NASDAQ Composite Index:   12377.87 12464.23   -0.7%
 **Connotation is Positive or Negative Divergence from the DJIA      

 

 

            

 

Ask Mr. Seifert

Question: What can happen to a Billionaire Risk Reversal Trade and what action should I take each week?

Bullish Billionaire Risk Reversal Trade: Initial 90-day Combo Position: Long 90-day ATM call, short 90-day ATM put and long 90-day ATM -2 put. Weekly Credit Spread Position: Short weekly ATM (+1) call and long weekly ATM +2 call.

Weekly Activities for a normal week:

Combo Position (Deferred):

  1. If the Market Edge Opinion on the stock is downgraded then this trade is over. Close entire deferred position (long call as well as short put and long put).
  2. If the stock closes above the long call, Hold the position (unrealized profit).
  3. If the stock closes below the long, Hold the position (unrealized loss).

Weekly Credit Spread Position:

  1. At expiration, if the stock closes at or above the weekly-short call strike. Close the spread (realized loss equal to the spread width minus the credit amount).
  2. At expiration, if the stock closes at or below the weekly-short call strike. Close or let the spread expire (realized profit equal to the credit amount).

Activities for after a big run up:

Combo Position (Deferred):

  1. Lock in profits by rolling UP your long deferred call if possible. When you roll UP, you are locking in some of the profits from the stock move.  For example, You have a stock that has moved in price from 100 to 140 and the CALL has moved up in price to 45.  You can roll the position – sell your 100 CALL and buy a 120 CALL at the same time.  The difference there is 20 in intrinsic value so you want to capture as much of that profit as possible.  Depending upon the time remaining to expiration the discount you receive will vary.  Try not to give up more than 20-30% of potential profit so in this case you would want to get a $14-$16 credit.
  2. Don’t roll up the position and understand that the large unrealized gain remains at risk.

Weekly Credit Spread Position:

  1. At expiration, if the stock closes at or above the weekly-short call strike. Close the spread (realized loss equal to the spread width minus the credit amount).
  2. At expiration, if the stock closes at or below the weekly-short call strike. Close or let the spread expire (realized profit equal to the credit amount).

‘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: 12/11/20 3663.46 S&P 500: 12/11/20 3663.46
S&P 500 Points Gain/Loss: 1177.72 S&P 500 Points Gain/Loss: 1072.36
S&P 500 % Gain/Loss: 47.4% S&P 500 % Gain/Loss: 41.4%
Risk Capital: $15,000 Risk Capital: $100,000
Optionomics Traders $ P/L: $8,689 Optionomics Covered Call $ P/L: $31,293
Optionomics Traders % P/L: 57.9% Optionomics Covered Call % P/L: 31.3%
Last Week’s Traders % P/L: -1.6% Last Week’s Covered Calls % P/L: -1.2%
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: 12/11/20 3663.46 S&P 500: 12/11/20 3663.46
S&P 500 Points Gain/Loss: 790.59 S&P 500 Points Gain/Loss: 756.05
S&P 500 % Gain/Loss: 27.5% S&P 500 % Gain/Loss: 26.0%
Risk Capital: $100,000 Risk Capital: $50,000
Optionomics Put-Call Hedge $  P/L: $34,130 Optionomics Billionaire Trade $ P/L: $219,082
Optionomics Put-Call Hedge % P/L: 34.1% Optionomics Billionaire Trade % P/L: 438.2%
       
Last Week’s Put-Call Hedge % P/L: 0.6% Last Week’s Billionaire Trade % P/L: -4.4%

 

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Mr. Seifert