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).
Volatile Week Ends Higher
The Bulls charged out of the gate to kick off October after a dismal September but were tripped up midweek by higher rates triggered by strong jobs data. Keeping with the ‘bad news is good news’ agenda, weak manufacturing data and construction spending coupled with a sharp drop in job openings gave some traders hopes that the Federal Reserve could slow their aggressive tightening as the week opened and the major averages turned in their best two-day rally since April 2020. The DJIA surged 1590.81-points (+5.5%) over the period, matched by a +5.6% spike in the NASDAQ as the different indexes shot off very oversold conditions. The rally was broad-based with every sector posting strong gains led by a +10% jump in the Energy (XLE) sector. Three days of strong jobs data however, pushed yields higher and equities lower as hawkish Fed members made comments that they didn’t see signs of inflation peaking and rates needed to move higher to get inflation under control. After Friday’s report that showed the Unemployment Rate easing to 3.5% from 3.7%, the CME Group FedWatch Tool projected an 80% probability of a 0.75-point hike at the November FOMC Meeting. Despite the late week drop off, most sectors were able to post positive with Energy (XLE) surging +13.58% followed by solid moves in Industrials (XLI), Materials (XLB), Communication Services (XLC) and Financial (XLF). Rate sensitive sectors REITs (XLRE) and Utilities (XLU) were the weakest groups followed by Consumer Discretionary (XLY) and Consumer Staples (XLP). Although the major averages tumbled into the weekend, they managed to snap a three-week losing streak and closed higher.
For the period, the DJIA gained 571.28 points (+2.0%) and settled at 29296.79. The S&P 500 added 54.04 points (+1.5%) and closed at 3639.66. The NASDAQ increased 76.78 points (+0.7%) finishing at 10652.40. The small cap Russell 2000 picked up 37.43 points (+2.2%), finishing at 1702.15.
Market Outlook: The technical condition of the market was mixed this week as the different indexes worked through a rip and dip but held on to post positive for the first week in four. The technical indicators are negative and moving more bearish after bouncing off oversold conditions and closed the week once again oversold. The DJIA, S&P 500, DJ Transportation Index and Philadelphia Semiconductor Index were coming off their lowest levels since November 2020 and those lows could be tested again. The NASDAQ and Russell 2000 continue to struggle to hold support at their June lows, but both indexes have retraced more than 50% of their March 2020 low to November 2021 high leaving next support at the 61.8% retracement. As mentioned last week, the DJIA and S&P 500 are both close to retracing 50% of their rallies and are likely near-term targets. The downside target for the DJIA is 27942 followed by the 50% retracement of the March 2020-January 2022 rally at 27580-27600. The S&P 500 target is 3528 followed by its 50% retracement of the March 2020-January 2022 rally at 3490-3500. The NASDAQ has already retraced 50% of its rally and has support at 10268. However, there were some bullish signs. The secondary indexes, including the DJ Transportation Index, small cap Russell 2000 and, including Friday’s -6.06% drop, the Philadelphia Semiconductor Index, outperformed the major averages. Market technicians look for those indexes to lead the market higher and lower and this at least gives the bulls something to consider. Although the VIX finished the week above 30, it remains muted to the market swings and we need to see a spike to at least 40 before a selloff would be considered a capitulation bottom which indicates we still have more room to the downside. Underlying breadth remains weak with the NYSE and NASDAQ Advance/Decline lines, considered leading indicators of market direction, showing strong distribution and have broken below the level seen at the June lows. New 52-week lows continue to outpace the new highs although we did see contraction in the new lows this week as the different indexes bounced off last week’s lows. We saw an uptick in bullish investor sentiment this week, but Friday’s jobs report may send the bulls back into hiding. We saw a big increase in the National Association of Active Investment Managers (NAAIM) Exposure Index which jumped from 12.6% all the way up to 38.1%. However, much of that could be related to window dressing on Monday and Tuesday for Q4 statements. That reflects the increase in daily volume on the same days. Retail investors also saw a small uptick in bulls but remain far below historical levels.
Although the November FOMC Meeting on rates is just under a month away, the CME Group FedWatch Tool projects an 80% probability of another 0.75-point hike in interest rates. That will raise the Fed’s fund target rate to 3.75-4.00. Friday’s dip in the Unemployment Rate to 3.5% from 3.7% the prior month sent rates higher as a tighter jobs market is one of the Federal Reserve’s key components to gauge the effectiveness of their rate hikes to rein in inflation. While soaring rates will keep investors on the sidelines until Fed members signal that inflation has peaked and a pause is in order, equities face other headwinds that should keep investors cautious and cash in their accounts. Next Friday, the Money Center Banks will kick off Q4 earnings and we’ll get to see if valuations are too high as they issue forward guidance. In addition, mid-term elections are a month away and recent polls are indicating that it has been a rough month for Democrats wanting to retain control of the House of Representatives. While I believe we will see an end of year rally to perhaps the 4,000 range on the S&P 500, investors may want to focus on preserving capital over the near-term. Until we see some resolution to the events mentioned, you won’t get hurt on the sidelines.
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 -11, 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 a negative configuration into October.
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 Negative at -8, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 105 units while the number of new 52-week lows exceeded the number of new highs on all five sessions. Breadth was also mixed at the NASDAQ as the A/D line added 43 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 23.1% vs. 12.6% the previous week, while those above their 200-day moving average increased to 19.5% vs. 12.3%. 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 Positive at +3, down four notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 10/05/22 shows outflows of 4.5 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bearish as of the week ending 8/26/2022 (DJIA – 32283.40).
Ask Mr. Seifert
Why do I lose money when I buy cheap puts and calls and I am right on my market direction call?
I am asked this question all the time. You are sure that Goldman Sachs (GS) is going to report earnings/revenues and you feel that the stock is going to rally. You decide that the best leverage is to buy out of the out of the money calls. They are cheap, only $0.50 cents and you think you will at least double your money. Right? Wrong! First, there are no cheap out of the money puts and calls. They are priced off the current At The Money Straddle and all market participants are aware of their value. Remember that for every option trade there must be a buyer for every seller and vice versa. So, when you buy that $0.20 delta cheap call you must be right in two ways. The price must go in your direction and it must be greater than premium you paid for the option’s strike price. The number comes out and you were right GS rallies $15 but your $0.20 call actually goes down in value! You are shocked and blame everyone but yourself. Here is what you need to do. First learn how the option model works. Second use strategies that will protect you when your price direction is correct. I can assure you that it is not buying cheap calls. Stop playing a game that you can’t win and learn how to use options to enhance your winners, not take them away. I think that you will agree that nothing in trading or investing is more frustrating than being right in the market only to lose your money.
FREE Two-Week Trial Subscription
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’ Strategies Includes The Following:
- The Basic Strategy: Bullish – Bearish Weekly 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 SPY Short-Term Power Play: Trade the SPY Index with a two day time frame.
The ‘Investors’ Strategy 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 either the ‘Traders’ plan or the ‘Investors’ plan for just $29.95 per month each on a month to month basis with no contract or strings attached. If you subscribe to both (great idea), it is only $49.95 per month which is a 20% 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 –
“Don’t Buy Them – Sell Them”
Mr. Seifert