Stocks Shrug Off Rising Covid-19 Cases
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages sank to start the week on a jump in coronavirus cases over the previous weekend, but the Federal Reserve rode in to the rescue and reversed a 762-point drop in the DJIA. Fed Chair Jerome Powell issued a term sheet for buying corporate bonds on the secondary market and the Dow ended the session with a 157.62 point (+0.62%) gain. While investors weighed a second wave of Covid-19 cases against the pace of a recovery, mostly better than expected economic data kept the major averages higher for a fourth week out of the last five. Buying in big cap technology names and ‘stay at home’ companies helped the NASDAQ finish with a six-day win streak. The market sectors were mixed led by gains in Healthcare (XLV), Technology (XLK), Communication Services (XLC), Consumer Staples (XLP) and Materials (XLB) all up more than +2%. Utilities (XLU), Energy (XLE) and REITs (XLRE) finished in the red. Crude oil prices nudged closer to $40 a barrel after the President called for a $1 trillion infrastructure bill, while gold prices also increased on rising tensions between China and India. The major averages gapped higher on Friday ahead of the weekend, but a report that Apple Co. (AAPL) was going to close some stores due to increased cases of Covid-19 took the wind out of the sales. The different indexes gave back much of the weekly gains, but were able to finish the week on index rebalancing and quadruple witching options expiration in the plus column.
For the period, the DJIA bounced back from the previous week’s loss adding 265.92 points (+1.0%) to close at 25871.46. The S&P 500 picked up 56.43 points (+1.9%) and finished at 3097.74. The NASDAQ jumped 357.31 points (+3.7%) and finished at 9946.12, while the small cap Russell 2000 gained 30.95 points (+2.2%) and settled at 1418.63.
Market Outlook:The technical condition of the market was little changed last week on choppy trading that helped work off the market’s overbought condition. After reaching historical high numbers earlier in the month the S&P Short Range Oscillator was able to close the week in neutral ground at +2.2%. The technical indicators are mostly neutral, but MACD, which signals short term trends in the market, slipped into bearish ground for most of the different indexes. Momentum, as measured by the 14-day RSI, is only bullish for the NASDAQ. Despite a positive week, there are several signs of negative divergence showing up in the charts of the major averages that could be signaling that a near term top may be in play. Last week several indexes finished with an island top reversal pattern on their charts and neither the DJIA nor the S&P 500 were able to close the gap and left the bearish pattern in place. In addition, the DJIA and small cap Russell 2000 were turned back at their respective 200-day moving average (MA) several times during the week. The divergence into negative ground for the DJ Transportation Index is also a concern. Technicians would like to see the transports and small caps lead the market. Weakness in the airlines is understandable, but if the reopening economy was gaining momentum, we would see more strength in trucking and railroads. There are positive elements however, as strength in semiconductors and biotech bode well for the market and show investors have exposure to growth and risk. The Philadelphia Semiconductor Index (SOX) outperformed jumping +3.3% this week and is close to its record high, while the iShares NASDAQ Biotechnology ETF (IBB) broke out on Friday to an all-time high after surging +4.9% for the period. Breadth was positive with the NYSE and NASDAQ Advance/Decline lines showing accumulation in the broader market, but below levels from two-weeks ago. The number of new 52-week highs remains anemic and that lack of new highs points to only a handful of stocks that are contributing the biggest gains to the market rally and remains a red flag. Finally, the Market Edge Strength Indexes have been inching lower for the last five weeks which shows the Advance/Decline line rate of change has been losing momentum, a negative factor.
With Q2 earnings on the horizon, and coronavirus cases on the rise, it’s looking more likely that we’ll need another catalyst for equities to advance much further. Lousy earnings are already factored in, and forward guidance is likely to be cloudy, so, barring a Covid-19 vaccine, I would doubt that stocks will be able to gain much momentum over the next few weeks. That could keep the major averages in a trading range with upside resistance for the S&P 500 at 3250 and support at 2850. For the DJIA, resistance comes in at 27600 and support at 24650.
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.
Presently the CTI is Positive at +5, down six notches from the previous week. The CTI was reset as of the week ending 4/03/20 and the bottom for the cycles was 3/23/20 indicating that a new bull market began on that date. Cycles A, C, D and E are bullish, while Cycle B is bearish. The CTI is projected to remain bullish into July.
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 +1, down a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 599 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also positive at the NASDAQ as the A/D line added 2164 units while the number of new highs beat the new lows on each day. Finally, the percentage of stocks above their 50-day moving average rose to 80.5% vs. 77.2% the previous week, while those above their 200-day moving jumped to 35.8% vs. 28.6%. 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. In addition, we track money flows into and out of Equity Funds and ETFs which as of 6/17/20 shows outflows of $25.5 billion. Currently, the Sentiment Index is Neutral at +1, up three notches from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 5/29/2020 (DJIA – 25383.11). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
| Market Timing Models | Current Reading | Prior Week | Connotation | |||||||||||
| Cyclical Trend Index (CTI): | 5 | 11 | Positive | |||||||||||
| Momentum Index: | 1 | 2 | Neutral | |||||||||||
| Sentiment Index: | 1 | -2 | Neutral | |||||||||||
| Strength Index – DJIA (DIA): | 75.9 | 86.2 | Positive | |||||||||||
| Strength Index – NASDAQ 100 (QQQ): | 65.3 | 81.6 | Positive | |||||||||||
| Strength Index – S&P 100 (OEX): | 73.4 | 77.7 | Positive | |||||||||||
| Dow Jones Industrial Average (DJIA): | 25871.46 | 25605.54 | 1.0% | |||||||||||
| S&P 500 Index: | , | 3097.74 | 3041.31 | 1.9% | ||||||||||
| NASDAQ Composite Index: | 9946.12 | 9588.81 | 3.7% | |||||||||||
| **Connotation is Positive or Negative Divergence from the DJIA | ||||||||||||||
Ask Mr. Seifert
Question: If the stock goes against me for either a bullish or bearish vertical credit spread trade, how is it that the trade can end up making a profit?
This is the beauty of selling vertical credit spreads. The trades are profitable in three out of four possible outcomes, even if the stock doesn’t go your way.
Scenario Outcome
- Stock stays the same. Win
- Stock goes your way. Win
- Stock goes against you by a small margin. Win
- Stock goes against you by a big margin. Loose
Here is what happens when the stock stays the same or moves against you by a small margin:
Bullish Put Credit Spread: (Stock = $100, sell 100.0 put buy 95.0 put for a $2.00 credit). If the stock closes on Friday at $98 or higher, the trade will either break even or result in a small profit even though the stock went the wrong way. The gain would be the amount of the credit minus the difference between the stock’s Friday close and the short put’s strike price.
Bearish Call Credit Spread: (Stock = $100, sell the 100.0 call and buy the 105.0 call for a $2.00 credit). If the stock closes on Friday at $102 or lower, the trade will either break even or result in a small profit even though the stock went the wrong way. The gain would be the amount of the credit minus the difference between the stock’s Friday close and the short call’s strike price.
FREE Two-Week Trial Subscription
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. Check out The Scoreboard on the home page to see our results.
Optionomics let you become the casino whereby you have a mathematical edge that enables you to grind out consistent returns. These strategies are designed to produce good returns over short to intermediate-term time frames 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 which includes detailed explanations and sample recommendations. You can see how the strategies are performing every week by clicking on The Scoreboard tab on the Home page. 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 my latest book, “Trading Options My Way”. I doubt that you have ever read anything like this.
The ‘Traders’ Subscription Includes The Following:
- The Bullish – Bearish Credit Spread Trade: 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 Earnings Season Trade: Potential big movers with little or no downside risk.
The ‘Investors’ Subscription Includes The Following:
- The 21st Century Covered Call Strategy: A modern day alternative to the old fashioned covered call strategy.
- The Low Cost Put-Call Hedge Strategy: Sleep at night knowing your portfolio is protected for little or no cost.
- The Billionaire Risk Reverse 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. I also have a webinar on Thursday afternoon where I discuss various option strategies, what is happening on the trading floors and answer any questions that you may have. Don’t worry if you miss the show. They are archived on the site. Sound Good? Good! You can subscribe to either the Traders or the Investor plans at an introductory special of only $39.95 each per month on a month to month basis with no contract or strings attached. That’s $10.00 off the regular subscription rate ($49.95). If you subscribe to both it is only $64.95 per month. 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