Bulls Keep Control
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).
CNBC has revised their Friday Option Action show which is aired weekly at 5:30. The show has been beefed up to the point that we think it is one of the best option oriented shows on the air. Check it out.
Back and forth trading finally left the major averages at new record highs ahead of the weekend as the bulls took control on Friday. Investors climbed a wall of worry during the period as rising Coronavirus cases led to a state of emergency in Japan ahead of the Olympics, while some analysts were concerned that supply issues could lead to a slowdown in growth and lead to hotter inflation. Uneven economic data kept pressure on rates as the yield on the 10-year T-Bill fell as low as 1.25% before ending the period at 1.35%. The 30-year Treasury closed the week below 2.0%. The indecisiveness led to mixed trading early in the week as big cap technology shares pushed the NASDAQ and S&P 500 to new record highs on Wednesday before a selloff on Thursday that saw the DJIA open with a 536-point drop. Investors stepped in after the Dow Jones bounced off support at its 50-day moving average (MA) and the major averages were back in the plus column for the week after Fridayís surge. The market sectors were mixed with REITs (XLRE), Utilities (XLU), Technology (XLK) and Consumer Discretionary (XLY) outperforming, while Energy (XLE), Financials (XLF) and Communication Services (XLC) were the weakest market groups. The narrowing of the yield curve weighed on the banks but investors were buyers again on Friday as they waited on Q2 earnings from the Money Center Banks next week. JP Morgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and Bank of America (BAC) all report earnings next week but remain below their 50-day MA. Crude oil prices were firm, around $74, as OPEC remained deadlocked on production goals. The late turn around sent the major averages up to the highs of the week on Friday, with all three closing at new record highs for a second straight week, while extending their weekly win streak to three.
For the period, the DJIA gained 83.81 points (+0.2%) and closed at 34870.16. The S&P 500 added 17.21 points (+0.4%) and settled at 4369.55. The NASDAQ picked up 62.59 points (+0.4%) to close at 14701.92, while the small cap Russell 2000 traded lower for a second week dropping 25.76 points (-1.1%) finishing at 2280.00.
Market Outlook: The technical condition of the market was mixed this week as negative divergence in underlying breadth, the Russell 2000 and DJ Transportation Index was unresolved. While the DJIA, S&P 500 and NASDAQ nudged higher, the small cap Russell 2000 and DJ Transports traded lower. The technical indicators for the big three indexes remained bullish with MACD, a short-term trend gauge, positive and Momentum, as measured by the 14-day RSI, in bullish ground. The different indexes traded off technical support and resistance levels as the DJIA bounced off its 50-day MA on Thursday before punching a new record high on Friday. The S&P 500 and NASDAQ found support at their respective 13-day MA before posting all-time highs. The move to new highs however was not confirmed by internal breadth, or the transports and small caps. Fridayís rally in the DJIA was on the second lowest volume day of the year. The Russell 2000 broke support at its 100-day MA and Fridayís rally barely lifted the index back above its 50-day MA, while the DJ Transportation Index ended the period just above its 100-day MA after falling below that secondary support level on Thursday. The NYSE and NASDAQ Advance/Decline lines were negative and the number of new 52-week highs contracted for both indexes throughout the week. The NASDAQ recorded more new 52-week lows than highs on Thursday for the first time since mid-May. Negative divergence in the indicators can be a warning of a trend change if not resolved over the near-term. Investor sentiment remains overly bullish implying that investors may be too complacent with the rally.
This week, Managing Director of US Equity Strategy at CFRA, Sam Stovall noted that the S&P 500 hasnít had a decline of 5% or more for 286 days. That is the longest streak in 35 years. Stovall went on to mention that historically the S&P 500 has had at least a 5% dip every six months or approximately 178 days. Obviously the current rally is long in the tooth, but the Federal Reserveís accommodative policy to keep rates lower for longer is keeping a floor under the market. Next week Q2 earnings will be in full swing and 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%). Although the likelihood for a selloff here seems low, Iíd remain cautious as some of the indicators followed are giving conflicting signals that could trip a runaway bull if heís not nimble.
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 -2, down five notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 924 units while the number of new 52-week highs out did the new lows on all four sessions. Breadth was mixed at the NASDAQ as the A/D line lost 2109 units while the number of new highs beat the new lows three out of four sessions. Finally, the percentage of stocks above their 50-day moving average declined to 38.8% vs. 53.4% the previous week, while those above their 200-day moving average slipped to 77.3% vs. 82.8%. 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 7/07/21 shows outflows of $4.3 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 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: | -2 | 3 | Neutral | ||||||
| Sentiment Index: | -3 | -4 | Negative | ||||||
| Strength Index – DJIA (DIA): | 31.0 | 34.5 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 56.3 | 53.1 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 28.0 | 28.0 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 34870.16 | 34786.35 | 0.2% | ||||||
| S&P 500 Index: | , | 4369.55 | 4352.34 | 0.4% | |||||
| NASDAQ Composite Index: | 14701.92 | 14639.33 | 0.4% | ||||||
Ask Mr. Seifert
Is it possible to sell a credit spread that has less risk than reward?
Yes, it is possible to sell a credit spread that has less risk than reward. The trade is called a 60/40. It is an aggressive directional spread. Here is how it works. Normally when we sell a credit spread we sell the ATM strike and buy a strike that is further out of the money. If you use a 60/40, we would sell a spread that is slightly in the money. We are not taking a neutral position. We are trying to predict the direction that stock will move. So instead of selling a 5.0 wide spread for $220 and assuming a $280 risk we would sell the spread for $280 and assume a $220 risk. We never risk more than the difference between the strikes minus the premium we collect from the spread. The difference is in the 60/40 spread, if the price doesn’t move in our favor, we will not collect the entire $280. We will collect a portion of the spread as a profit. The 60/40 is a spread that many professional traders use when they are confident that the price will move in their favor.
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