Bears Come Out of Hibernation
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).
Rate hike jitters sent the major averages sharply lower this week as Treasury yields climbed to their highest levels since January 2020 before settling back ahead of next week’s FOMC Meeting. The yield on the 10-year T-Bill closed at 1.76% after touching 1.90% on Wednesday. A bad jobs report and missed earnings from Goldman Sachs (GS) and Netflix (NFLX) also weighed on investor sentiment as a -21.79% drop in Netflix on Friday helped trigger another -2.72% dip in the NASDAQ. Selling was across the board during the period with every sector finishing in the red led down by a more than -6% slide in Consumer Discretionary (XLY), Technology (XLK) and Financials (XLF). Materials (XLB), Communication Services (XLC) and Industrials (XLI) also lagged the broader market. The different indexes were unable to hold key support levels and only the Philadelphia Semiconductor Index finished the period above its 200-day moving average (MA) despite dropping -11.9% on the week. Traders added to commodity stocks and the CRB (Commodity) Index hit its highest mark since 2014. Crude oil prices hit a seven-year high, flirting with $88 a barrel before settling at $84.89. Precious Metals were also on the rise as tensions between Russia and the US escalated over Ukraine. On Wednesday, the Vectors Gold Miners ETF (GDX) jumped +7.16%, while Global X Silver Miners ETF (SIL) gained +7.92%. The different indexes tumbled into the weekend led lower by the NASDAQ turning in its worst weekly percentage loss since March 2020. The DJIA and S&P 500 were down for a third consecutive week.
For the period, the DJIA lost 1646.44 points (-4.6%) and settled at 34265.37. The S&P 500 fell 264.91 points (-5.7%) and closed at 4397.94. The NASDAQ dropped 1124.83 points (-7.6%) finishing at 13768.92, while the small cap Russell 2000 gave up 174.59 points (-8.1%), finishing at 1987.92.
Market Outlook: The technical condition of the market deteriorated this week as the major averages broke below key support levels. The technical indicators are firmly in the bearish camp but are now mostly oversold. MACD, which gauges the short-term trend, is bearish and Momentum, as measured by the 14-day RSI, has fallen below 30 for most of the indexes. A closer look at the sectors shows that only the Energy (XLE), Consumer Staples (XLP) and Utilities (XLU) still trade above their respective 50-day MA. Every other sector currently trades below either its 100 or 200-day MA indicating the intermediate-term trend is bearish. The NASDAQ entered correction territory during the week, down more than 13%. The DJIA and S&P 500 were down about -6% and -7.5% respectively. Secondary indexes the DJ Transportation Index is off about -9.5%, while the small cap Russell 2000 is close to a bear market having dropped about -17.6%. Market technicians look for the small caps to lead the markets higher and lower and the Russell 2000’s drop is another warning that we’re likely to see the broader market work its way lower. With the major averages now below their 200-day MA, the DJIA and S&P 500 look destined to join the NASDAQ in a correction. Downside target for the DJIA is 33,850-34,000 and 4350-4375 for the S&P 500. Internal market breadth remains negative with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, both losing significant ground this week. In addition, the number of new 52-week lows continue to expand on both the NYSE and NASDAQ, while the number of new highs have been contracting for the last three weeks. Investor Sentiment, however, is overly bearish and approaching a level that is hinting that a market bottom could be around the corner. Sentiment indicators are viewed as contrarian signs when they near extreme levels. The recent American Association of Individual Investors (AAII) survey shows bullish sentiment down to a 18-month low and bearish sentiment at a 16-month high. Finally, as of Friday, the Market Edge/S&P Short Range Oscillator (SRO) was at -6.53% and historically, the stock market has been near or at a bottom when the SRO has hit -6.50% to -7%.
The Federal Reserve’s shift in policy to ward off inflation has roiled the stock market and led to a reset of pricing for the major averages and stocks in general. Next week the January FOMC Meeting gets underway, and Fed Chair Jerome Powell will likely do his best to calm jittery investors at his press conference on Wednesday. That should lead to a relief rally but until the Federal Reserve gets more data to gauge how the tapering of assets and the uptick in rates will affect inflation and economic growth, investors may want to remain cautious over the near-term.
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 +6, down a notch from the previous week. Cycles B, D and E are bullish, while Cycles A and C are bearish. The CTI is projected to remain positive for at least one or two more weeks.
Momentum Index (MI): The markets 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, up two notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 7360 units while the number of new 52-week lows exceeded the number of new highs on all four sessions. Breadth was also negative at the NASDAQ as the A/D line lost 9806 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 dropped to 31.7% vs. 48.4% the previous week, while those above their 200-day moving average fell to 37.8% vs. 53.0%. 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 markets 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 Positive at +4, up two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 1/19/22 shows outflows of $2.4 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 1/14/2022 (DJIA – 35911.81).
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!
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The option ‘Strategies’ offered by the Optionomics Group are unique in that they all have limited risk while creating great leverage. Our Basic Strategy, “Bullish – Bearish Credit Spread Trades” lets you control 100 shares of a $200 stock, a $20,000 position for less than $500 which is 40:1 leverage. Your maximum risk is always limited, and our strategies produce winning trades in three out of four possible outcomes.
Optionomics lets you be the casino whereby you have a mathematical edge that enables you to grind out good, consistent returns. over a short to intermediate-term time frame 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 Mr. Seifert’s latest book, “Trading Options My Way”. I doubt that you have ever read anything like this.
The ‘Traders’ Subscription Includes The Following:
- The Basic Strategy: Bullish And Bearish Credit Spread Trades: 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 ‘Investors’ Subscription Includes The Following:
- 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 the ‘Traders’ plan for $29.95 per month or the ‘Investors’ plan for $49.95 per month on a month to month basis with no contract or strings attached. If you subscribe to both (great idea), it is only $59.95 per month which is a 25% discount off the regular subscription rate. 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 –
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