Santa Delivers A Record Setting Rally
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).
It looked like the Santa rally would be derailed as the week got underway, but Old St. Nick showed up early to snap a three-day skid and gift wrap the S&P 500 with a new record high. Global markets bogged down on spiking Omicron cases and the failure of the Senate to pass President Biden’s $1.75 trillion Build Back Better Bill on Monday and equities stumbled into the week. The DJIA recovered from a 699-point drop, but finished the day down 433.28 points (-1.23%) at 34932.16. The major averages were able to turn it around on Tuesday after key moving average (MA) support levels were tested and buyers came in off the sidelines. Sparking the turnaround was a report that the FDA was ready to approve Pfizer (PFE) and Merck’s (MRK) oral antiviral Covid treatments. Investors scooped up beaten down shares on hopes the oral treatments would curb the spread of Omicron and equities staged a three-day rally. The gains were broad based with every sector participating led by strength in Consumer Discretionary (XLY), Technology (XLK), Communication Services (XLC) and Energy (XLE). The major averages ended the short holiday week on a high note, having erased the selloff since the Omicron variant news hit world markets after Thanksgiving, and were at or flirting with new all-time highs again as the week came to a close.
For the period, the DJIA added 585.12 points (+1.7%) and settled at 35950.56. The S&P 500 picked up 105.15 points (+2.3%) and closed at 4725.79. The NASDAQ jumped 483.69 points (+3.2%) finishing at 15653.37, while the small cap Russell 2000 tacked on 67.65 points (+3.1%), finishing at 2241.58.
Market Outlook: The technical condition of the market improved this week as the major averages were able to test support levels before taking a stab at their old highs. The technical indicators returned to positive ground for the different indexes with MACD, used to gauge the short-term trend, and Momentum, as measured by the 14-day RSI, crossing into bullish territory, and rising. The major averages are trading back above their 50-day MA but secondary index the DJ Transportation Index ran into resistance at its 50-day MA, while the small cap Russell 200 stalled below its 200-day MA. Underlying breadth, which has been showing negative divergence, also improved this week but still points to a somewhat top-heavy market despite this week’s gains. The NYSE and NASDAQ Advance-Decline lines, leading indicators of market direction, both gained units, but new 52-week highs lagged new lows for a fifth consecutive week. However, there was contraction in the numbers which indicates that perhaps a near term bottom has been put in, but still calls for cautious trading. Investor sentiment remains neutral as both retail investors and hedge funds remain cautious and under invested in equities.
The Santa rally kicked off a little early this week as investors became more optimistic that Omicron fears would be contained after the FDA approved oral treatments to treat symptoms. That could push the major averages to new record highs across the board as we head into January. The ‘official’ start to the Santa rally begins this year on 12/23 and going back to 1993 there have been only six years in which the S&P 500 didn’t trade higher during that period. While there is no guarantee that the stock market will rally into January, a track record with 80% winners suggests that we should have easy sledding next week.
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 was reset to a positive configuration after last week’s low and is projected to remain positive the remainder of the year.
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 +0, down two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2898 units while the number of new 52-week highs exceeded the number of new lows on two of the four sessions. Breadth was mixed at the NASDAQ as the A/D line added 3133 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 39.2% vs. 33.4% the previous week, while those above their 200-day moving average increased to 48.8% vs. 47.0%. 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 +1, down a from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 12/15/21 shows outflows of $1.3 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).
Ask Mr. Seifert
What is Pin Risk and how do I deal with it?
Answer: When the weekly options expire each Friday, the profit or loss in the spread is calculated by subtracting the credit or debit from the strikes used in the spread. The resulting number is the profit or loss. Even using $1 strikes there is a 99% chance that price will not settle exactly on a strike. If you are using $5 wide strikes there is a 1 in 500 chance it will settle on a strike, but from time to time it will happen. If you have either a debit or credit spread in place, it could settle on either the short end or the long end of the spread. If it settles on the short end most likely you will be assigned 50% of the shares, and vice versa if it settles on the long end you should exercise 50% of the shares.
Why 50% of the shares? Because there is the “other side of the trade”. Remember when you are short an option someone must be long the option. So, they have same problem that you do, and most logical solution is for them to exercise 50% of their options. Does it always work perfectly? No, nothing works all of the time, but it gives you the best mathematical solution to end up without having stock in your account on Monday. If you do end up with stock on Monday you will either take delivery or buy or sell the shares to get flat the market. In my 35 plus years of trading options I have found that this trade, although scary, has ended up being a scratch in the long run!
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