Stocks Struggle With Rising Rates
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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 traded mixed this week as investors kept an eye on rising rates and a weaker than expected Jobs report. The DJIA outperformed as a rotation into cyclical and banking shares weighed on technology and momentum names. Interest rates moved higher on inflation concerns and a strong economic forecast from several Fed committee members pushing yields and the yield curve back to pre-pandemic rates. The 10-year Treasury finished the week at 1.33%, while the 30-year T-Bill yield hit 2.13%. That gave a boost to financial stocks with Dow components JP Morgan Chase (JPM), American Express (AXP) and Goldman Sachs (GS) all hitting new highs. Crude oil prices briefly traded back above $60 a barrel for the first time since January 2020 after winter storms knocked out power to millions across the US. The US Dollar nudged lower as Congress prepared to vote on a $1.9 trillion coronavirus relief package next week, despite signs that the economy could overheat in the second half of the year. That gave a boost to commodities and emerging markets. Copper prices rose to a fresh nine-year high and the iShares Emerging Market ETF (EEM) hit another record close. The sectors finished the week mixed with Energy (XLE), Financials (XLF), Industrials (XLI) and Materials (XLB) trading higher, while Healthcare (XLV), Utilities (XLU), Technology (XLK) and Consumer Staples (XLP) moved lower. The major averages traded mixed throughout the week, consolidating recent recent gains, and traded on both sides of the breakeven line again on Friday. The sideways trading however, helped the different indexes work off their overbought condition despite finishing the period at, or near, record highs. After the dust settled the DJIA carried a three-week win streak into the weekend, while the NASDAQ and S&P 500 ended with marginal losses.
For the period, the DJIA gained 35.92 points (+0.1%) and closed at 31494.32. The S&P 500 fell 28.12 points (-0.7%) and settled at 3906.71. The NASDAQ lost 221.01 points (-1.6%) to close at 13874.46, while the small cap Russell 2000 slipped 22.67 points (-1.0%) finishing at 2266.69.
Market Outlook: The technical condition of the market was mixed last week as the DJIA, DJ Transportation Index and NYSE recorded new highs, but the NASDAQ and small cap Russell 2000 struggled, but still finished about 1% below their own all-time highs. The technical indicators remain mostly bullish, though MACD, a short-term trend indicator, crossed into bearish territory for the NASDAQ and Russell 2000. Momentum, however, remains positive for the different indexes. The DJ Transportation Index outperformed the broader market this week and was able to post a new all-time high on Friday. That bodes well for stocks going forward as market technicians would like to see the transports lead in bull markets. Underlying breadth also remains a positive despite some churning and the NYSE Advance/Decline line finished just below its record high from last Friday showing equities are still under accumulation. The number of new 52-week highs in the NYSE and NASDAQ have expanded showing leadership in the rally is broad based. Investor sentiment still shows signs of being too bullish with the National Assoc. of Active Investment Managers reporting portfolios on margin for a second straight week. In addition, FINRA shows Customer Margin Accounts hit another record high in January, up +21% since the first of November. Neither are reasons to sell but show that sentiment is getting frothy as stocks push to new highs. These are looked at as contrarian indicators when they get too bullish. If everyone is bullish, and in the market, who are the new buyers?
The major averages struggled near record highs but with more liquidity hitting the market as early as next week, downside looks limited here. Furthermore, with Covid-19 cases falling and vaccine distribution starting to pick up, economic growth is going to continue to strengthen as we move into Spring. With that said, investors need to keep an eye on the rise in interest rates. As long as 1.5% resistance holds in the 10-year Treasury yield, the bull can continue to run. The stock market can handle rising rates, but the speed that rates rise is always the problem and the yield on the 10-year is up 40-basis points since the start of the year. This week’s churning helped alleviate the market’s overbought condition, so look for the major averages to nudge higher, and dips bought, as the stock market posts new record highs over the next few weeks.
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, unchanged from the previous week. Cycles A, B, C, D and E are bullish. The CTI is projected to remain in Bullish Territory into April.
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, unchanged from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 769 units while the number of new 52-week highs out did the new lows on all four sessions. Breadth was also mixed at the NASDAQ as the A/D line fell 981 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 74.3% vs. 80.3% the previous week, while those above their 200-day moving average eased to 89.4% vs. 90.4%. 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 2/17/21 shows inflows of $9.6 billion. Currently, the Sentiment Index is Negative at -4, 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.
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Question: Is there anywhere on the Optionomics web site where I can get a short description of the ‘Traders’ and ‘Investors’ strategies?
Yes there is. It is called Quick Take. When you retrieve any of the selections from either the “Traders’ or ‘Investor’ drop downs on the home page there is a brief description of the trade and a Summary section which details the desired results of the trades. An example of a Quick Take for the One-Day Wonder Bullish and Bearish Trades follows:
Quick Take: One-Day Wonder – Bullish Trade
Time Frame: One Day.
Underlying Stock: Bullish Market Edge Opinion – No Stock Position.
Desired Stock Price Direction: Up.
Option Position: Long Deferred ATM -1or -2 Call – Short Expiring ATM +1 or +2 Call.
Maximum Risk: Initial debit spread amount.
Summary: The stock performs as anticipated. The premium (air) is the short expiring call goes to zero while the long deferred call gains additional premium.
Quick Take: One-Day Wonder – Bearish Trade
Time Frame: One Day.
Underlying Stock: Bearish Market Edge Opinion – No Stock Position.
Desired Stock Price Direction: Down.
Option Position: Long Deferred ATM +1 or +2 Put – Short Expiring ATM -1 or -2 Put.
Maximum Risk: Initial debit spread amount.
Summary: The stock performs as anticipated. The premium (air) in the short expiring put goes to zero while the long deferred put gains additional premium.
‘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: | 02/19/21 | 3906.71 | S&P 500: | 02/19/21 | 3906.71 | ||
| S&P 500 Points Gain/Loss: | 1420.97 | S&P 500 Points Gain/Loss: | 1315.61 | ||||
| S&P 500 % Gain/Loss: | 57.2% | S&P 500 % Gain/Loss: | 50.8% | ||||
| Risk Capital: | $15,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $10,827 | Optionomics Covered Call $ P/L: | $31,240 | ||||
| Optionomics Traders % P/L: | 72.2% | Optionomics Covered Call % P/L: | 31.2% | ||||
| Last Week’s Traders % P/L: | 1.9% | Last Week’s Covered Calls % P/L: | 0.0% | ||||
| 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: | 02/19/21 | 3906.71 | S&P 500: | 02/19/21 | 3906.71 | ||
| S&P 500 Points Gain/Loss: | 1033.84 | S&P 500 Points Gain/Loss: | 999.30 | ||||
| S&P 500 % Gain/Loss: | 36.0% | S&P 500 % Gain/Loss: | 34.4% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $38,984 | Optionomics Billionaire Trade $ P/L: | $266,906 | ||||
| Optionomics Put-Call Hedge % P/L: | 39.0% | Optionomics Billionaire Trade % P/L: | 533.8% | ||||
| Last Week’s Put-Call Hedge % P/L: | -0.7% | Last Week’s Billionaire Trade % P/L: | 0.1% | ||||
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