NASDAQ Continues To Lead The Market Higher
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
U.S. stocks were mixed this week before a strong rally on Friday saw the major averages post modest gains as improving economic data outlasted rising Covid-19 cases. Robust hiring data coupled with a slowing of layoffs, surging mortgage applications and decreasing jobless claims pushed the NASDAQ and NASDAQ 100 to new record highs on four sessions during the week. Upside seemed limited mid-week as Coronavirus hotspots in the South and West concerned investors about the state of the recovery and possible second wave of restrictions. However, biotechnology and leisure stocks got a shot in the arm on Friday with promising vaccine drug trials. The gains were led by Communications Services (XLC), Consumer Discretionary (XLY) and Technology (XLK) while Energy (XLE), Real Estate (XLRE), and Industrials (XLI) were all down at least 1% on the week. Gold continued to be a haven as volatility rose while crude oil prices popped over the $40 a barrel mark. Investors were becoming concerned this week as early earnings reports for Q2 have guided lower as it eyes the all-important Money Center banks with a focus on their future guidance.
For the period, the DJIA was able to post a gain of 247.94 points (+1.0%) to close at 26075.30. The S&P 500 added 55.03 points (+1.8%) and finished at 3185.04. The NASDAQ closed at another record, jumping another 409.81 points (+4.0%) to finish at 10617.44, while the small cap Russell 2000 underperformed and was somewhat even, losing just 9.96 points (-0.7%) and settled at 1421.90. The DJ Transportation Index managed to eke out a gain for the week as it moved up +0.8%.
Market Outlook: The technical condition of the market was mixed this week as the major averages moved modestly with the NASDAQ and NDX 100 hitting several new highs during the period. The technical indicators were again in neutral to bullish territory with MACD, which looks at the short-term trend, moving into bullish ground on the NASDAQ and S&P 500. Momentum, as measured by 14-day RSI, was also in neutral to positive ground for the different indexes. Unlike last week, strong momentum confirmed the NASDAQ’s move to new highs this week but is close to topping out. VIX managed to stay under 30, which is looked upon positively and DJ Transportation was higher for the week. However, negative divergences are present for the DJIA, as the blue-chip index remains locked under resistance at its 200-day moving average (MA). As mentioned previously, a close above that level would serve as confirmation and be a positive for the short to intermediate trend. Momentum for the Dow remains muted as the 14-day RSI has been moving sideways for a month. In addition, the small cap Russell 2000 Index remained underwater for the week.
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 +4, unchanged 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 change to a negative reading within the next week or two which could change the Market Posture to neutral or bearish.
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 +5, up two notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 306 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also mixed at the NASDAQ as the A/D line lost 432 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 eased to 52.5% vs. 66.8% the previous week, while those above their 200-day moving average increased to 35.9% vs. 34.8%. 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 7/08/20 shows outflows of -$1.5 billion. Currently, the Sentiment Index is Negative at -1, down 2 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.
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Market Timing Models |
Current Reading | Prior Week | Connotation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
**Connotation is Positive or Negative Divergence from the DJIA |
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Ask Mr. Seifert
Question: How does market volatility effect option prices?
Volatility is an integral part of option premiums. When there is an increase of fear in the market which is usually due to a sharp decline in prices, volatility has a tendency to spike. This is due to a strong demand for put options by fearful traders who bid up the price of puts to protect their long positions. When volatility increases, option premiums tend to rise while declining volatility often sees lower time premiums. Buying put options in the face of a sharp market decline can result in a ‘volatility crush’ meaning that the option can loose time premium solely from a decline in implied volatility even if the underlying stock declines in price. Often is the case that retail traders are confronted with this dilemma. We refer to it as the air coming out of the balloon and it is an integral part of most of our option strategies which involve selling credit spreads to take advantage of the time decay (theta) inherent in option pricing.
‘Traders’ And ‘Investors’ Results
| ‘Traders’ Results | 21st Century Covered Call Results | ||||||
| Performance Since Week Ending 1/04/19 | Performance Since Week Ending 11/06/17 | ||||||
| S&P 500: | 01/04/19 | 2485.74 | S&P 500: | 11/06/17 | 2591.10 | ||
| S&P 500: | 07/10/20 | 3185.04 | S&P 500: | 07/10/20 | 3185.04 | ||
| S&P 500 Points Gain/Loss: | 699.30 | S&P 500 Points Gain/Loss: | 593.94 | ||||
| S&P 500 % Gain/Loss: | 28.1% | S&P 500 % Gain/Loss: | 22.9% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $7,157 | Optionomics Covered Call $ P/L: | $31,616 | ||||
| Optionomics Traders % P/L: | 35.8% | Optionomics Covered Call % P/L: | 31.6% | ||||
| Last Week’s Traders % P/L: | 0.9% | Last Week’s Covered Calls % P/L: | 0.4% | ||||
| Put-Call Hedge Results | The Billionaire Risk Reversal Results | ||||||
| Performance Since Week Ending 1/26/18 | Performance Since Week Ending 04/12/19 | ||||||
| S&P 500: | 01/26/18 | 2872.87 | S&P 500: | 04/12/19 | 2907.41 | ||
| S&P 500: | 07/10/20 | 3185.04 | S&P 500: | 07/10/20 | 3185.04 | ||
| S&P 500 Points Gain/Loss: | 312.17 | S&P 500 Points Gain/Loss: | 277.63 | ||||
| S&P 500 % Gain/Loss: | 10.9% | S&P 500 % Gain/Loss: | 9.5% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $20,408 | Optionomics Billionaire Trade $ P/L: | $6,587 | ||||
| Optionomics Put-Call Hedge % P/L: | 20.4% | Optionomics Billionaire Trade % P/L: | 355.7% | ||||
| Last Week’s Put-Call Hedge % P/L: | -3.9% | Last Week’s Billionaire Trade % P/L: | 17.7% | ||||
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