Holiday Trifecta
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 closed out the week and the first half of the year at new record highs as the US economy reopened to strong, pent-up demand and better than expected jobs numbers. The S&P 500 has put up seven consecutive all-time highs, the NASDAQ recorded three record highs and the DJIA finally played some catch up and finished the week at its own new high as the different indexes closed out the best first half of the year since 2019. Feeding the rally was economic growth that may be showing signs of easing, keeping pressure on yields, while the Federal Reserve continued to broadcast that inflation was transitory and price pressures were due to inventories that struggled to keep up with demand from the reopening. Technology shares led the gains on the back of the slide in rates with the Philadelphia Semiconductor Index (SOX) surging to a new high midweek led by gains in Advanced Micro Devices (AMD) and NVIDIDA (NVDA). The semiconductor index is up +16.6% off its May low, while NVIDIA has surged +52.2% over that same time period. Initial Jobless Claims fell to a pandemic low on Thursday, while a goldilocks report on Friday showed 850k jobs created in June vs. 700k expected and above the 559k new jobs in May, but the Unemployment Rate rising to +5.9%. The rally was broad based led by strength in Technology (XLK), Communication Services (XLC), Healthcare (XLV) and Consumer Discretionary (XLY) which all punched new highs to close out the week. Only Energy (XLE) and defensive sectors REITs (XLRE) and Utilities (XLU) finished the period lower. Crude oil prices continued their ascent despite seeing strong demand as more countries reopened, Russia and OPEC delayed making a decision on increasing production. Oil touched its highest price since 2018. The yield on the 10-year Treasury closed the week at 1.43%, its lowest rate since March, while the 30-year T-Bill fell to a 2.04% yield. The major averages melted up into the close on Friday as investors looked ahead to Q2 earnings rolling out in less than two weeks. Currently, according to Factset Research, the estimated Q2 earnings growth rate for the S&P 500 is 62.8%. If 62.8% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2009 (108.9%). That should keep sellers at bay for a while longer.
For the period, the DJIA gained 352.51 points (+1.0%) and closed at 34786.35. The S&P 500 added 71.64 points (+1.7%) and settled at 4352.34. The NASDAQ outperformed and picked up 278.94 points (+1.9%) to close at 14639.33, while the small cap Russell 2000 snapped a five-week win streak dropping 28.64 points (-1.2%) finishing at 2305.76.
Market Outlook: The technical condition of the market continued to improve this week as the major averages were able to close the period at new all-time highs. The technical indicators are in bullish ground and rising but are reaching overbought levels for the S&P 500 and NASDAQ. MACD, a short-term trend gauge, is bullish for the major averages and momentum is strong with the 14-day RSI still rising. Growth sectors are leading the gains which is a plus going forward. The small cap Russell 2000 and DJ Transportation Index are showing negative divergence however and have lagged the broader market for a while. Despite a five-week win streak that ended this week, the Russell 2000 remains range bound and hasn’t been able to break out to new highs. The DJ Transportation Index last made a new high in early May and remains below its 50-day moving average (MA). Market technicians would like to see the transports and small caps lead the market. Internal breadth is positive but is showing some deterioration. The NYSE Advance/Decline line, a leading indicator of market direction, hit several new highs this week, but the NASDAQ A/D line lost ground despite the index closing higher on four days. In addition, new 52-week highs remain positive but have contracted on the NASDAQ and have been stagnant on the NYSE. Further deterioration in underlying breadth while the major averages are making new highs is another sign of negative divergence that needs to be watched. Investor sentiment continues to be overly bullish and this week we are back to exuberant levels. The American Association of Individual Investors shows retail investors are 2.2:1 in the bullish camp, up from 1.4:1 in May, while the National Association of Active Investment Managers (NAAIM) Exposure Index shows hedge funds are 91.7% invested, up from 70.9% a week ago. These are contrarian indicators at extreme levels as if everyone is in the market, who is left to drive prices higher?
It looks like the Bulls have a wide open highway as they drive into July. But historically, that complacency can trip a rally when one least expects it. This week, as the different indexes nudged higher, it looked once again like the big cap tech and FAANG names were back in the lead. However, rather than a rush to catch the train before it left the station, prices were rising due to a lack of sellers. The bar is set high for Q2 earnings, but companies are not likely to disappoint as the economy reopens and consumers are flush with cash. Record earnings could be the catalyst for another leg up for the major averages, but don’t take your eye off the potential for inflationary pressures to be greater than expected. As we saw a few weeks ago, a ‘taper tantrum’ hits fast and can hurt.
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 Negative at -9, unchanged from the previous week. Cycles A and E are bullish, while Cycles B, C and D are bearish. The CTI is projected to remain in negative territory into July. At that time we will see a reset of the different cycles that should lead to a resumption of the bull market into the fall.
Momentum Index (MI): The marketís 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 Neutral at +3, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 695 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was mixed at the NASDAQ as the A/D line lost 1674 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 eased to 53.4% vs. 54.8% the previous week, while those above their 200-day moving average slid to 82.8% vs. 83.5%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the marketís Bullish or Bearish sentiment is important when attempting to determine the marketís 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 6/30/21 shows inflows of $6 billion. Currently, the Sentiment Index is Negative at -4, down a notch from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ëMarket Postureí is Bearish as of the week ending 6/18/2021 (DJIA ñ 33290.08). 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 | -9 | Negative | ||||||
| Momentum Index: | 3 | 1 | Neutral | ||||||
| Sentiment Index: | -4 | -3 | Negative | ||||||
| Strength Index – DJIA (DIA): | 34.5 | 17.2 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 53.1 | 44.8 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 28.0 | 22.6 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 34786.35 | 34433.84 | 1.0% | ||||||
| S&P 500 Index: | , | 4352.34 | 4280.70 | 1.7% | |||||
| NASDAQ Composite Index: | 14639.33 | 14360.39 | 1.9% | ||||||
Ask Mr. Seifert
Why is market psychology so important to success as a trader or investor?
Without a doubt the most important aspect of trading or investing isn’t numbers. Everyone has numbers. It is your emotional view of the market that is the key. I have been a trader and investor for over 40 years. I have taught scores of people how to trade and the one common trait that all successful traders and investors have is that they understand how the market works. It has never ceased to amaze me how little veteran traders or investors comprehend when I ask them how a trade takes place. How can you expect to beat the New England Patriots if you don’t know what defense they are in? It is incredible that most experienced traders believe that when the market is rallying it is because there are more “buyers than sellers”. They listen to the media and that is what they tell them is going on during a rally. When the market is breaking, they are told there are more “sellers than buyers”. So here is my first lesson on market psychology. The market is an auction where buyers and sellers bid and offer for a security or option. For every buyer there must be a seller. When they agree to exchange wealth it is called “price discovery”. The market is in equilibrium, even if it is only for a few seconds. So how does the market rally if the number of buyers and sellers are the same? The buyers are willing to pay more to get in. When they can’t find any sellers at the price they want they must “bid the market higher”, until they find where the sellers will exchange wealth. First lesson. Don’t listen to the media. They rarely have a clue!
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
|