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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
After an opening push to new highs to start the week, the major averages traded in a narrow range before rallying again on Thursday to close out the week and the year at new record highs. Equities rallied on Monday after President Trump signed off on a $900 billion coronavirus relief package over the weekend, and Covid-19 vaccines around the globe were distributed. Big cap technology shares, FAANG and travel related stocks led the charge. The different indexes traded mixed after that as party bickering in Congress prevented a finalized stimulus bill to advance. A last minute push to separate higher stimulus checks with other relief measures on Thursday however, triggered another spike in the different indexes and equities were able to close out the session in record territory. The gains were broad based led by Utilities (XLU), REITs (XLRE), Communication Services (XLC), Financials (XLF), Consumer Discretionary (XLY) and Healthcare (XLV), while only Energy (XLE) finished with a small loss. International and Emerging markets were strong as the US Dollar drifted lower. The US dollar closed the Thursday at its weakest level since early 2018. The iShares Emerging Markets ETF (EEM) hit several new highs during the week. Yields were little-changed and the yield on the 10-year Treasury finished the period at 0.91%. The week-ending spike in prices lifted the DJIA and NASDAQ higher for a third consecutive week, while the S&P 500 closed positive for the second time in three weeks as the stock market closed out a surprising year with a bang.
For the period, the DJIA added 406.61 points (+1.3%) and closed at 30606.48. The S&P 500 jumped 53.01 points (+1.4%) and settled at 3756.07. The NASDAQ gained 83.55 points (+0.7%) to 12888.28, while the small cap Russell 2000 bucked the trend losing 29.09 points (-1.5%) and finished at 1974.86 snapping an eight-week win streak.
Market Outlook: The technical condition of the market improved this week as the major averages were able to touch new record highs, but the DJ Transports and small cap Russell 2000 finished lower. The technical indicators remained in positive territory and momentum improved. Momentum for the Russell 2000 and DJ Transportation Index however, slipped into neutral ground and MACD ST, which measures the short-term trend of a stock or index, crossed into bearish territory. The NASDAQ and Russell 2000 went into the week overbought and some consolidation of recent gains would be a positive going forward. The DJ Transportation Index showed negative divergence again and traded lower for a fourth-straight week. Technicians would like to see the transports and small caps lead the market, both higher and lower, and this negative divergence could be a warning of some market weakness to start the year. However, the Russell 2000 ended an eight-week win streak and was overdue for a pause.
Underlying breadth was mixed this week. The NYSE Advance/Decline line, which is a leading indicator of market direction, hit several new highs this week, but has moved mostly sideways for the last few weeks. The NASDAQ Advance/Decline line was negative for the week and is almost unchanged over the last two weeks. New 52-week highs also contracted showing fewer stocks pushing the different indexes into record territory. Investor sentiment is still too bullish but has been reined in some over the last two weeks. As mentioned last week, FINRA shows Debit Balances in Customers’ Securities Margin Accounts reached a record high of $722,118,000 in November. That’s another contrarian indicator that could lead to a sharper selloff if margin-calls were to come into play during any market weakness. Although there are minor signs of negative divergence, nothing in the charts says the market is due for a correction any time soon and the CTI (Cyclical Trend Index), a market forecasting indicator is projecting the bullish trend to continue over the near-term.
Thursday was the first day of what is known as the January effect that tends to predict whether we will be up or down in the coming year. It takes place from the last trading day in December through the fifth trading day in January and with Thursday’s jump in prices it is off to good start. Most market participants and analysts are calling for the current Bull market to continue through 2021 and I tend to agree. With the amount of global stimulus from Central Banks and a ramp up in vaccinations to fight the coronavirus, we may be looking at the new “Roaring 20’s”. While market returns this year have been more than anyone would have projected in March, let’s hope that a vaccinated Bull still has some ground to cover in 2021.
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 +9, down two notches from the previous week. Cycles A, B, C, D and E are bullish. 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, down two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 978 units while the number of new 52-week highs out did the new lows on all four days. Breadth was mixed at the NASDAQ as the A/D line lost 249 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 81.6% vs. 81.8% the previous week, while those above their 200-day moving average deceased to 89.2% vs. 89.3%. 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 12/23/20 shows inflows of $11.1 billion. Currently, the Sentiment Index is Negative at -3, 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): | 9 | 11 | Positive | ||||||
| Momentum Index: | 4 | 6 | Positive | ||||||
| Sentiment Index: | -3 | -3 | Negative | ||||||
| Strength Index – DJIA (DIA): | 55.2 | 44.8 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 61.5 | 56.3 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 50.5 | 38.7 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 30606.48 | 30199.87 | 1.3% | ||||||
| S&P 500 Index: | , | 3756.07 | 3703.06 | 1.4% | |||||
| NASDAQ Composite Index: | 12888.28 | 12804.73 | 0.7% | ||||||
| **Connotation is Positive or Negative Divergence from the DJIA | |||||||||
Ask Mr. Seifert
Question: What is the best way to initiate a credit spread?
Answer: Getting the spread on correctly is important, novice traders blow themselves up trying to get the “edge” on the market makers. Forget about that strategy it won’t work, you are not going to be able to out execute the market makers. There are a couple of choices that will work getting the spread in place. First you can “leg” the spread by buying the long side of the trade first and selling the short leg second. I use this strategy when I have a preference in market direction. I get my limited risk leg on first and then try to sell the credit side with more premium. Second you can set your browser on the site you are using to find out where the spread is trading in the market. You should be able to get filled within a few cents either way once you know where the spread is trading in the live market. The third way is always wrong it is to leg the spread by selling the short option leg first. This is selling a naked option and will eventually cause a big loser. You are not going to beat the wise guys at their game. Eventually the impossible will happen and as soon as you sell the naked option Houston will get 50 inches of rain, and you will take a possible risk of $280 and turn it into $3000! You will then email me and tell me that I don’t know what I am doing, and the risk is much greater than I claim it is. Remember bulls and bears make money in the market, pigs get slaughtered! Don’t be a pig there is plenty of money to be made doing it the right way!
‘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: | 01/01/21 | 3756.07 | S&P 500: | 01/01/21 | 3756.07 | ||
| S&P 500 Points Gain/Loss: | 1270.33 | S&P 500 Points Gain/Loss: | 1164.97 | ||||
| S&P 500 % Gain/Loss: | 49.0% | S&P 500 % Gain/Loss: | 45.0% | ||||
| Risk Capital: | $15,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $9,399 | Optionomics Covered Call $ P/L: | $31,696 | ||||
| Optionomics Traders % P/L: | 62.7% | Optionomics Covered Call % P/L: | 31.7% | ||||
| Last Week’s Traders % P/L: | -5.4% | Last Week’s Covered Calls % P/L: | 0.8% | ||||
| 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: | 01/01/21 | 3756.07 | S&P 500: | 01/01/21 | 3756.07 | ||
| S&P 500 Points Gain/Loss: | 883.20 | S&P 500 Points Gain/Loss: | 848.66 | ||||
| S&P 500 % Gain/Loss: | 30.7% | S&P 500 % Gain/Loss: | 29.2% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $40,406 | Optionomics Billionaire Trade $ P/L: | $232,601 | ||||
| Optionomics Put-Call Hedge % P/L: | 40.4% | Optionomics Billionaire Trade % P/L: | 465.2% | ||||
| Last Week’s Put-Call Hedge % P/L: | 2.7% | Last Week’s Billionaire Trade % P/L: | 14.4% | ||||
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