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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).

Stocks Gain Ahead of Q2 Earnings

Investors had to juggle mixed economic data and stubbornly strong job reports this week, with recession fears as the market prepares for Q2 earnings. The major averages tanked at the open on Tuesday as commodity prices tumbled on slower global growth concerns, but a pullback in yields brought buyers off the sidelines. The DJIA dropped 700-points before erasing most of the loss in the afternoon, while the S&P 500 and NASDAQ were able to climb back into the plus column. Traders shifted from cyclical to growth stocks and the CRB Commodity Index fell -6.72%. Cautious investors bought a dip on Wednesday as they looked ahead to the Minutes from the June FOMC Meeting to be released with growth stocks again leading the bounce. The focus was on jobs as the short week wrapped up with a small increase in Initial Jobless Claims sending stocks higher on Thursday, while a better-than-expected jobs report on Friday sent yields on the 2 and 10-year T-Bills back above 3%. Friday’s jobs report probably inked a 0.75-point hike in rates at the July FOMC Meeting and the yield curve remained inverted on recession fears. The rate on the 2-year T-Bill closed at 3.11%, while the 10-year rate landed at 3.08%. Beaten up growth sectors outperformed as Consumer Discretionary (XLY), Technology (XLK), Communication Services (XLC) and Healthcare (XLV) led the market’s advance as FANG and big cap technology names surged, while Utilities (XLU), Energy (XLE) and Materials (XLB) were the laggards. Crude oil prices moved below $100 a barrel on demand concerns before finishing the week at $104.73 a barrel. The major averages battled the crosswinds of rising rates with expectations of slower growth but ended the period higher for the second time in three weeks.

For the period, the DJIA added 240.89 points (+0.8%) and settled at 31338.15. The S&P 500 picked up 74.05 points (+1.9%) and closed at 3899.38. The NASDAQ jumped 507.46 points (+4.6%) finishing at 11635.31. The small cap Russell 2000 gained 41.60 points (+2.4%), finishing at 1769.36.

Market Outlook: The technical condition of the market improved this week as the major averages regained some positive momentum to finish higher. The technical indicators once again returned to neutral to bullish but remained mixed. MACD, which gauges the short-term trend, crossed into bullish ground, while Momentum, as measured by the 14-day RSI, increased, but remains in neutral territory. The NASDAQ was able to briefly trade above its 50-day MA for the first time since April, which is a positive. However, the different indexes still face stiff resistance at the June highs. The secondary indexes performed somewhat better than the major averages with the small cap Russell 2000 and Philadelphia Semiconductor Index, spiking +6.5%, the strongest performers, which is a plus for the market. The iShares Biotechnology ETF (IBB) jumped +5.4%, another plus. The Positive divergence in the secondary indexes can forewarn of a market rally. Underlying breadth also points to some positive divergence showing stocks are under accumulation with the NYSE and NASDAQ Advance/Decline lines moving higher. In addition, the number of new 52-week lows contracted. The number of new lows on both the NYSE and NASDAQ were both under 100 on Friday, down from more than 1,000 three weeks ago. Investor Sentiment remains overly bearish and both retail and institutional investor indicators moved further into bearish ground this week after the previous week’s selloff. Overly bearish sentiment is recognized as a contrarian indicator and adds credence that a bottom is most likely in.

This week we had more Fed officials calling for a 0.75-point hike in rates at the July FOMC Meeting and Friday’s jobs number certainly won’t make the Fed reconsider. The major averages haven’t been able to make much headway as yields tick higher and next week stocks face another hurdle as Q2 earnings roll in with the Money Center Banks scheduled to start on Wednesday. While I’ve been somewhat surprised that we haven’t gotten more companies issuing warnings, investors will need to focus on forward guidance to gauge how rising rates are affecting the consumer and economy. As reported last week, the Federal Bank of Atlanta released its GDPNow tracker projecting Q2 GDP contracted by -1.0%. The economy doesn’t always fall into a recession after successive negative quarters, and the strong jobs data suggest otherwise, but we should have a better idea at the end of next week if aggressive Fed tightening may be tipping the scales too far. Keep an eye on next week’s CPI out on Wednesday. If inflation is higher than expected, around +8% YoY, we could see the Fed look to hike rates another 0.50-point in September, which could see stocks take another leg down.

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 A, B, C and E are bullish, while Cycle D is bearish. The CTI is projected to remain positive into August.

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 Positive at +6, up a notch from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 441 units while the number of new 52-week lows exceeded the number of new highs on all four sessions. Breadth was also mixed at the NASDAQ as the A/D line added 2716 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 30.5% vs. 21.4% the previous week, while those above their 200-day moving average rose to 17.0% vs. 16.0%. 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 Positive at +6, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 7/06/22 shows outflows of $7.9 billion.

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 6/24/2022 (DJIA – 31500.68). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.

Ask Mr. Seifert

How Do You Calculate The Probability Of Profit (POP) For A Vertical Credit Spread When Using the Think Or Swim (TOS) Platform?

 The key element when calculating POP is the Break-Even (BE) price of the credit spread. For example, if you sell a Bullish 100.0 – 95.0 vertical put credit spread for a $2.00 credit (40%) when the underlying is trading at $100.00, the POP calculation is as follows: Subtract the $2.00 credit from the short put strike price (100.0) to get the BE price ($98.00) for the trade. If the underlying settles at $98.00 or higher, the trade will make at least a $0.01 profit. Now click on the Analyze tab and then On Probability Analysis. Enter the symbol for the underlying. Put the cross hair on the expiration date at the bottom of the chart (x axis)  and scroll to the breakeven price on the left side of the graph (y axis). The percentage above the BE price line is the POP for the bullish, put-credit spread.

If you are initiating a Bearish 100.0 – 105.0 vertical call-credit spread, add the credit ($2.00) to the short call strike price (100.0) to get the BE price ($102.00) for the trade. If the underlying settles at $102.00 or lower, the trade will make at least a $0.01 profit. Check the TOS, Analyze screen. The percentage below the BE price line is the POP for the bearish call-credit spread.

 

Bullish Vertical Put Credit Spread:  1)  Subtract The Credit From Short Put SP = BE Price.  2) The % Above The BE Price On The Analyze Screen Is The POP For The Trade.

 

Bearish Vertical Call Credit Spread: 1)  Add The Credit To The Short Call SP =BE. 2) The % Below The BE Price On The Analyze Screen Is The POP For The Trade.

Check out the TOS educational video at https://www.google.com/search?q=options+probability+calculator+thinkorswim&rlz=1C1CHBF_enUS750US750&oq=Options+probability+&aqs=chrome.6.0i512l2j69i57j0i512l7.24995j0j15&sourceid=chrome&ie=UTF-8#kpvalbx=_vsK1Yt78H8CckPIP-_yymAs83

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