CNBC has revised their Option Action show which is aired every weekday night at 5:30. They have really beefed up the Friday show to the point that we think it is one of the best option oriented shows on the air. Check it out.
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages bounced back from last week’s losses and punched new record highs across the board as investors celebrated the peaceful transfer of power to our 46th President of the United States this week. Equities opened the week higher on Tuesday as incoming Treasury-Secretary Janet Yellen urged lawmakers to ‘act big’ in providing more stimulus to counter the coronavirus. The market hit new all-time highs on Wednesday led by strength in Technology (XLK) and the FAANG stocks. General Motors (GM) and Microsoft (MSFT) also outperformed and hit new highs as the duo announced a $2 billion investment in General Motor’s self-driving electric car venture Cruise. Strong manufacturing data on Thursday, coupled with a small dip in jobless claims left the different indexes little changed before weakness in International Business Machines (IBM) and Intel (INTC), despite beating earnings estimates on Friday stalled the week’s rebound. The yield on the 10-year Treasury increased to +1.12% during the period before settling unchanged at +1.08%. Copper prices, a precursor of economic activity, finished the week close to an eight-year high, while the US Dollar gave back most of its gains over the last two weeks boosting commodities and foreign markets. The iShares Emerging Markets ETF (EEM) recorded a new high on Thursday and is up almost 8% in January. The market sectors were mixed with Communication Services (XLC), Technology (XLK) and Consumer Discretionary (XLY) outperforming and posting new record highs, while Financials (XLF), Energy (XLE) and Materials (XLB) closed lower. Despite the different indexes finishing the period overbought by several measures, next week, tech heavyweights Apple (AAPL), Facebook (FB), Microsoft (MSFT) and Advanced Micro Devices (AMD) are set to release Q4 earnings and we could see the major averages notch record highs once again with tech stocks taking the lead. Also helping to boost equities will be more progress in distributing vaccines and ongoing stimulus talks as the Biden team takes the field.
For the period, the DJIA finished higher for a second straight week as it added 181.82 points (+0.6%) and closed at 30996.08. The S&P 500 picked up 73.22 points (+1.9%) and settled at 3841.47. The NASDAQ outperformed jumping 544.56 points (+4.2%) to 13543.06, while the small cap Russell 2000 finished higher for the 11th time in 12 weeks gaining 45.56 points (+2.1%) finishing at 2168.76.
Market Outlook:The technical condition of the market improved this week as the major averages muscled back into record territory. The technical indicators moved higher and are in bullish ground and Momentum, as measured by the 14-day RSI, is strong, but in some cases, overbought. The 14-day RSI was above 70 for the NASDAQ, Russell 2000, and Philadelphia Semiconductor Index which could lead to some consolidation. Some backing and filling to work off the overbought condition would be in order as since 11/01/20 the Russell 2000 is up +40.97%, the Philadelphia Semiconductor Index has surged +36.87% and the NASDAQ has gained +24.12%, compared to a +17.48% gain in the S&P 500. Furthermore, the S&P 500 is trading about 15% above its 200-day moving average (MA) which will take some selling to revert to its mean. Underlying market breadth remains bullish with new 52-week highs having expanded and new 52-week lows in the single-digits on both the NYSE and NASDAQ. The NYSE Advance/Decline line, a leading indicator of market direction, made a new high on Wednesday and the NASDAQ A/D line is also at a new recovery high. Investor sentiment, however, remains too bullish and complacent, with red flags waving. This week FINRA released Margin Debt as of the end of December and it increased +7.7% to another record high of $778,037 million. What is more concerning is that Margin Debt has jumped +18% since the end of October. Furthermore, the National Association of Active Investment managers (NAAIM) rose to 112.9 this week, its high-water mark going back to the week ending 12/13/2017. That means that even the professionals are carrying 12.9% of portfolio balances on margin. The good news is that despite that extreme level, the market didn’t correct that year for another three weeks. Still, when indicators are at or, near extreme levels, some degree of caution needs to be practiced and perhaps decreasing your margin debt here would be a way of selling into market strength.
Investors gave a sigh of relief this week as the inauguration of Biden eliminated some of the uncertainty that had been hanging over the stock market. Biden’s plans for increasing vaccines and rushing new stimulus into the economy has also firmed equities. The next two weeks bring the onslaught of Q4 earnings and so far, they are better than expected and CEO’s are issuing strong forward guidance. With the major averages overextended, we are likely to see an increase in volatility here but, a move below 18-20 in the VIX would be a sign that traders are getting more comfortable with valuations and could trigger more upside. The Market Edge CTI is projected to remain Bullish for another week or two before changing to a Bearish market posture so more upside should be in the cards. Upside targets for this bullish cycle remain 32,135 for the DJIA, 3900 for the S&P 500 and 13,700 for the NASDAQ.
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 +3, down six notches from the previous week. Cycles A, C, D and E are bullish, while Cycle B is bearish. The CTI projects a Bullish market cycle for a few more weeks.
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 +9, up four notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 1153 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line gained 2488 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 fell to 80.1% vs. 81.9% the previous week, while those above their 200-day moving average eased to 89.9% vs. 90.1%. 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 1/20/21 shows inflows of $3.6 billion. Currently, the Sentiment Index is Negative at -3, 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 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): | 3 | 9 | Positive | ||||||
| Momentum Index: | 9 | 5 | Positive | ||||||
| Sentiment Index: | -3 | -4 | Negative | ||||||
| Strength Index – DJIA (DIA): | 41.4 | 41.4 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 42.7 | 47.9 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 40.9 | 45.2 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 30996.08 | 30814.26 | 0.6% | ||||||
| S&P 500 Index: | , | 3841.47 | 3768.25 | 1.9% | |||||
| NASDAQ Composite Index: | 13543.06 | 12998.50 | 4.2% | ||||||
| **Connotation is Positive or Negative Divergence from the DJIA | |||||||||
Ask Mr. Seifert
Question: What can happen at expiration to the Basic Strategy, Put-Call Spreads and the Blow Off ‘Traders’ strategies and what action should I take?
Basic Strategy: Bullish Put Credit Spreads: Short weekly expiring ATM put, long weekly expiring ATM -2 put.
- If Stock Closes At Or Above The Short Put SP. Let The Spread Expire Worthless (Profit)
- If Stock Closes Below The Short Put SP. Close The Spread (Possible Loss)
Basic Strategy: Bearish Call Credit Spreads: Short weekly expiring ATM call, long weekly expiring ATM +2 call.
- If Stock Closes At Or Below The Short Put SP. Let The Spread Expire Worthless (Profit)
- If Stock Closes Above The Short Put SP. Close The Spread (Possible Loss)
Bearish Blow Off Tops: Short weekly expiring ATM call, long weekly expiring ATM +2 call and long deferred ITM put.
- a) If Stock Closes At Or Below The Short Call SP. Let The Spread Expire Worthless. Sell or Hold The ITM Put. (Profit)
- b) If Stock Closes Above The Short Call SP. Close The Spread And Sell The ITM Put. (Possible Loss)
Bullish Blow Off Bottoms: Short weekly expiring ATM put, long weekly expiring ATM -2 put and long deferred ITM call.
- a) If Stock Closes At Or Above The Short Put SP. Let The Spread Expire Worthless. Sell or Hold The ITM Call. (Profit)
- b) If Stock Closes Below The Short Put SP. Close The Spread And Sell The ITM Call. (Possible Loss)
‘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: | 01/22/21 | 3841.47 | S&P 500: | 01/22/21 | 3841.47 | ||
| S&P 500 Points Gain/Loss: | 1355.73 | S&P 500 Points Gain/Loss: | 1250.37 | ||||
| S&P 500 % Gain/Loss: | 54.5% | S&P 500 % Gain/Loss: | 48.3% | ||||
| Risk Capital: | $15,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $9,399 | Optionomics Covered Call $ P/L: | $31,870 | ||||
| Optionomics Traders % P/L: | 66.9% | Optionomics Covered Call % P/L: | 31.9% | ||||
| Last Week’s Traders % P/L: | -0.1% | Last Week’s Covered Calls % P/L: | 0.1% | ||||
| 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: | 01/22/21 | 3841.47 | S&P 500: | 01/22/21 | 3841.47 | ||
| S&P 500 Points Gain/Loss: | 968.60 | S&P 500 Points Gain/Loss: | 934.06 | ||||
| S&P 500 % Gain/Loss: | 33.7% | S&P 500 % Gain/Loss: | 32.1% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $40,570 | Optionomics Billionaire Trade $ P/L: | $246,837 | ||||
| Optionomics Put-Call Hedge % P/L: | 40.6% | Optionomics Billionaire Trade % P/L: | 493.7% | ||||
| Last Week’s Put-Call Hedge % P/L: | 0.0% | Last Week’s Billionaire Trade % P/L: | 9.2% | ||||
FREE Two-Week Trial Subscription
| The option ‘Trades’ and ‘Strategies’ offered by the Optionomics Group are unique in that they all have limited risk while creating great leverage. Our basic Bullish – Bearish Credit Spread Trade lets you control 100 shares of a $200 stock, a $20,000 position for less than $500 or 40:1 leverage. Your maximum risk is always limited, and our strategies produce winning trades in three out of four possible outcomes.
Optionomics let you become the casino whereby you have a mathematical edge that enables you to grind out consistent returns. These strategies are designed to produce good returns over short to intermediate-term time frames in any type of market environment. Optionomics offers a FREE Two-Week trial to its entire web site with no cost or strings attached. Each of the strategies are explained in a 5-7 page booklet and a video which includes detailed explanations and sample recommendations. During the trial, you can paper trade the various strategies and get a feel for the deal without risking a penny. Simply click on the appropriate tab on the Optionomics’ Home page to access the informative booklets and then sign up for the trail. As a special offer, you can download a FREE copy of my latest book, “Trading Options My Way”. I doubt that you have ever read anything like this. The ‘Traders’ Subscription Includes The Following: · The Bullish – Bearish Credit Spread Trade: A basic strategy to trading weekly credit spreads. · The One Day Wonder Trade: A one day trade with great consistency and upside potential. · The Blow Off Top – Bottom Trade: A lot of action and big moves too. · The Earnings Season Trade: Potential big movers with little or no downside risk. The ‘Investors’ Subscription Includes The Following: · The 21st Century Covered Call Strategy: A modern day alternative to the old-fashioned covered call strategy. · The Low Cost Put-Call Hedge Strategy: Sleep at night knowing your portfolio is protected for little or no cost. · The Billionaire Risk Reversal Strategy: Big time leverage – small time risk. Each Monday morning by 11:00 EST, the recommendations for each strategy are posted on the Optionomics’ web site. In addition, the updated results from the previous week are posted on the Optionomics’ Scoreboard. You can subscribe to either the Traders or the Investors plans at an introductory special of only $39.95 each per month on a month to month basis with no contract or strings attached. That’s $10.00 off the regular monthly subscription rate ($49.95). If you subscribe to both it is only $64.95 per month. I think you will agree that this is a super offer so give it a try. Go to www.optionomicsgroup.com and get started today doing what the pros do – “Don’t Buy Them – Sell Them” Mr. Seifert
|