Volatile Week Ends Positive
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).
Stocks tripped over rising yields and an impasse on raising the debt ceiling to start the week as the rate on the 10-year Treasury topped 1.5% for the first time since June. Investors dumped growth and momentum names and the NASDAQ tumbled -2.1% led down by a -4.9% drop in shares of Facebook (FB). Dip buyers erased Monday’s slide on Tuesday, but a stronger than expected ADP payrolls report on Wednesday fueled tapering concerns sending the major averages sharply lower once again at the open. The market turned on a dime in the afternoon however, after Congress agreed to terms on raising the debt ceiling by $480 billion, averting a default by the US until December. The DJIA erased a 460-point plunge at the open on Fed tapering concerns and finished higher for a second straight session. The different indexes surged higher on Thursday after Congress signed off on the debt ceiling extension, but a much weaker than expected September jobs report on Friday, that showed the slowest jobs growth rate of the year, left the market mixed as the report posed more questions about the economy than answers. As mentioned, growth stocks, FAANG and rate sensitive sectors underperformed, while gains were led by strength in Energy (XLE), after crude oil prices touched $80 a barrel on Friday, and Financials (XLF), as rates nudged higher leaving the 10-year T-Bill yield at 1.60%. Industrials (XLI) were also strong led by a +2.7% move in the DJ Transportation Index. The rebound was broad based leaving only the Communication Services (XLC), REITs (XLRE) and Healthcare (XLV) sectors in the red, the latter on continued weakness in biotech. The iShares NASDAQ Biotechnology ETF (IBB) is down more than -10% over the last two weeks. Despite volatile trading which saw the S&P 500 swing up or down more than 1% on three days, the major averages were able to finish the period positive and the Dow Jones its best weekly performance since June.
For the period, the DJIA gained 419.79 points (+1.2%) and closed at 34746.25. The S&P 500 added 34.30 points (+0.8%) and settled at 4391.34. The NASDAQ picked up 22.20 points (+0.2%) to close at 14579.54, while the small cap Russell 2000 lost 8.54 points (-0.4%), finishing at 2233.09.
Market Outlook: The technical condition of the market improved somewhat this week as the major averages worked higher after their recent 5% intraday correction. The technical indicators for the indexes are mostly in neutral territory but improving with MACD, a short-term trend gauge, bullish for the DJIA, S&P 500 and DJ Transportation Index. Momentum, however, remains neutral except for the transports. The DJIA, S&P 500 and NASDAQ remain below their respective 50-day moving average (MA), but secondary indexes Russell 2000 and DJ Transports have crossed back above that key resistance level. In addition, the transports broke through a declining trend line on Friday that has been in place since May, which is another plus. Market technicians would prefer that the transports and small caps lead the market. However, the small cap Russell 2000 remains firmly in the middle of a trading range that has been in place since February. Cyclical sectors continue to find buyers and Energy (XLE) and Financials (XLF) are the only sectors trading at new 52-week highs. Though off its previous high, Consumer Discretionary (XLY) is the only other sector trading above its 50-day MA implying underlying weakness in the broader market. Lastly, this week’s dip in the DJIA once again held above support at the 33750 level, which the Dow has tested six times since May. With investors expecting the Federal Reserve to announce tapering asset purchases in November, that’s a level to watch if the market participants throw a ‘taper tantrum’ on the news.
Internal breadth remains mixed with the NYSE Advance/Decline line firming this week but the NASDAQ A/D line struggling, showing most stocks remain in distribution. Further weakness is evident in the number of new 52-week lows vs. new highs. The NASDAQ posted more new weekly lows than highs for a fourth consecutive week, which also shows negative divergence and underlying weakness. Sentiment is bearish to neutral and could be close to signaling a buy on the market after backing off extreme levels of bullishness in the summer. This week the Percentage of Bullish Investment Advisors fell to 40.4% which is the lowest read for the professionals since a 33.3% mark the week ending 4/9/20, while the American Association of Individual Investors (AAII) saw bulls drop to 25.5%, its lowest read since mid-September. Sentiment indicators are best used as contrarian indicators and when reaching extreme levels of bullishness or bearishness, can be used for entry and exit points for investors.
Despite volatile trading, the major averages continued to bend without breaking. Aside from selling related to raising the debt ceiling, investors have been rotating out of growth and into cyclical stocks that correlate with an economy that is reopening. While the overweighted big cap technology shares may exaggerate some selloffs, the shift to financials, energy and oil related shares, retail and even travel and transportation stocks has been enough to limit downside in the market. Next week we kickoff Q3 earnings with the Money Center Banks and we should get a good view of whether earnings momentum will carry the stock market higher into year-end. According to FactSet Research, the estimated Q3 earnings growth rate for the S&P 500 sits currently at 27.6%, which would be the third-highest Y-O-Y quarterly growth rate since 2010. However, 71% of S&P 500 companies are pointing to supply chain issues and costs that will affect revenues and could lead to more choppy trading.
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 +10, unchanged from the previous week. Cycles A, B, C, D and E are bullish. The CTI is projected to remain in a positive configuration into November.
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 Neutral at -2, down five notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 312 units while the number of new 52-week highs exceeded the number of new lows on four of five sessions. Breadth was negative at the NASDAQ as the A/D line lost 1272 units while the number of new lows out did the new highs on each day. Finally, the percentage of stocks above their 50-day moving average jumped to 43.3% vs. 32.7% the previous week, while those above their 200-day moving average increased to 57.6% vs. 52.1%. 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. The Sentiment Index is Neutral at +2, down a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 10/06/21 shows inflows of $4.9 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 7/30/2021 (DJIA – 34935.47). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
Industry Group Rankings: What’s Hot (40) What’s Not (51). Of the 91 Industry Groups that we track, 40 are rated as either Strong or Improving while 51 are regarded as Weak or Deteriorating. The previous week’s totals were 49-42. The following are the strongest and weakest groups for the period ending 10/07/21. Strongest: Other Recreation, Marine Transportation, Casinos and Trucking. Weakest: Airfreight/Couriers, Internet-Software, Metals-Non Ferrous and Diversified Mining. To review all of the Industry Group rankings click on the Industries tab.
ETF Center: The top performing ETF categories for the week ending 10/07/21 were: Commodity-Energy (+3.64%), Sector-Financial (+2.76%), Sector-Energy (+2.74%), Commodity-Blend (+2.10%) and Sector-Internet (+2.09%). The weakest categories were: Sector-Alternative Energy (-2.26%), Shorts (-1.64%), Bond-Government Long Term (-1.43%) and Bond-Investment Grade (-0.78%). To review all of the ETF categories in the Market Edge universe, click on the ETF tab.
By David L. Blake, CMT
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | 10 | 10 | Positive | ||||||
| Momentum Index: | -2 | 3 | Neutral | ||||||
| Sentiment Index: | 2 | 3 | Neutral | ||||||
| Strength Index – DJIA (DIA): | 44.8 | 31.0 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 35.1 | 39.4 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 36.6 | 31.2 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 34746.25 | 34326.46 | 1.2% | ||||||
| S&P 500 Index: | 4391.34 | 4357.04 | 0.8% | ||||||
| NASDAQ Composite Index: | 14579.54 | 14566.70 | 0.1% | ||||||
| *Connotation is Positive or Negative Divergence from the DJIA | |||||||||
| Momentum Index Components | Current Reading | Prior Week | Connotation | ||||||
| *Dow Jones Industrial Averages (DJIA): | 34746.25 | 34326.46 | |||||||
| *DJ Transportation Ave | 14640.46 | 14250.71 | Negative | ||||||
| *S&P 500 Index | 4391.34 | 4357.04 | Positive | ||||||
| *NYSE Composite Index | 16517.23 | 16323.74 | Negative | ||||||
| *NYSE Advance – Decline Line | 523737 | 523425 | Positive | ||||||
| *10 Day MA Advance – Decline Line | 0.99 | 1.00 | Negative | ||||||
| *NDX 100 Index | 14820.75 | 14791.87 | Positive | ||||||
| *NASDAQ Composite Index | 14579.54 | 14566.70 | Negative | ||||||
| *DJ Utilities Index | 884.70 | 872.82 | Negative | ||||||
| *Russell 2000 | 2233.09 | 2241.63 | Positive | ||||||
| Trin – 5 Day Average | 0.82 | 0.98 | Neutral | ||||||
| NYSE Weekly New Highs – New Lows | 237-196 | 203-148 | Negative | ||||||
| Zweig Breadth Indicator | 0.45 | 0.70 | Neutral | ||||||
| McClellan Oscillator | -34 | -11 | Neutral | ||||||
| McClellan Summation Index | 726 | 694 | Positive | ||||||
| Unchanged Issue Index | 0.05 | 0.03 | Negative | ||||||
| Sentiment Index Components | Current Reading | Prior Week | Connotation | ||||||
| Fear-Greed Index – 5 Day Average | 27.20 | 28.40 | Neutral | ||||||
| Shares Sold Short NYSE – Monthly (000) | 14160443 | 14049026 | |||||||
| NYSE Short Interest Ratio – NYSE Only | 2.6 | 2.6 | Bullish | ||||||
| Shares Sold Short NASDAQ – Monthly (000) | 11014972 | 11023176 | |||||||
| NASDAQ Short Interest Ratio | 2.8 | 2.8 | Bullish | ||||||
| AAII Bull-Bear Ratio | 0.7 | 0.7 | Bullish | ||||||
| Put/Call Ratio – 5 Day Avg All Equity Options | 0.99 | 1.02 | Bearish | ||||||
| Dividend Yield Spread | 0.29 | -0.35 | Bullish | ||||||
| NAAIM Exposure Index | 68.6 | 55.0 | Neutral | ||||||
| Bullish Investment Advisors | 40.4 | 46.5 | Neutral | ||||||
| Bearish Investment Advisors | 22.5 | 22.1 | Neutral | ||||||
| Bullish – Bearish Investment Advisors Ratio | 1.8 | 2.1 | Neutral | ||||||
| VIX – CBOE Volatility Index | 18.77 | 22.56 | Neutral | ||||||
Ask Mr. Seifert
Question: What is ‘The Three O’clock Ting’ and how do I handle it?
If you have ever been short an option (put or call) you have probably experienced what we call ‘The Three O’clock Ting’ which happens on expiration day if your option is trading in the money. Since all of the Optionomics strategies involve the selling of one form or another of a credit spread, you are going to run into this situation from time to time.
When you are short one option, you can be assigned the underlying stock which means that if you are short a put, you could end up being long 100 shares of the underlying at the close on expiration day. If you are short one call, you could end up being short 100 shares of the underlying. If your short option is either in or near to being in the money, your friendly broker will usually either call you or send you an e-mail to see what you want to do. This usually happens around 3:00 on expiration day which is usually Friday. The following is an example of an e-mail you may receive if you sold a CVX 90 – 92 call credit spread and the stock is trading above $90.
Your CVX short – $90 call option expires today. If CVX closes above $90, you’ll likely be assigned to sell 100 shares of CVX for $90 per share leaving you short 100 shares of stock.
or
Your CVX long – $92 call option expires today. It will exercise automatically if CVX closes above $92 leaving you long 100 shares of stock at $92. If you can’t buy 100 shares of CVX, we’ll sell your option about an hour before market close
If this happens, here are your options:
- If your short option is out of the money and you think it will expire worthless, don’t do anything. Pocket the doe and move on.
- If the option is in the money and looks like you will be assigned, you can buy back the short option and that would be the end of it. You will either have a small profit if the option is trading below where you sold it or a small loss if the option is trading above where you sold it.
- If you have sufficient funds in your account, the broker should leave things alone and let you get assigned. You will end up on Monday morning with either a long (short put) or short (short call) position of 100 shares of the underlying stock.
- If you don’t have sufficient funds in your account to cover an assignment, your broker will cover the short part of your credit spread at around 3:00 at the market price which is usually a bad deal. Here is why.
Remember, the reason you are short the option in the first place is to take advantage of the inherent time decay (theta) of the option’s premium which occurs as it approaches expiration. You would be surprised how much premium can be remaining in an option with only one hour remaining until expiration. Assuming the underlying stock’s price remains the same through the close, that premium should be yours, not the market maker. The only way to keep this remaining part of the premium is to be able to wait it out which you can do if you have sufficient funds in your account to cover the assignment. This way you can close the position closer to 4:00 and bag the doe which can add up over time.
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| 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.
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