Stocks Skid on Tech Rotation
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A roller coaster week ended with the major averages marginally lower this week as investors offset mixed earnings and rising coronavirus cases, with vaccine and additional stimulus hopes. Increased tensions between the US and China also kept pressure on equities helping to send stocks down Thursday and Friday. Swings in big cap technology names shook up traders to start the week starting with a 263.90-point (+2.51%) surge in the NASDAQ on Monday as shares of Amazon (AMZN), Microsoft (MSFT), Intel (INTC), Tesla (TSLA) and others outperformed after analysts raised price targets. The Technology (XLK), Communication Services (XLC) and Consumer Discretionary (XLY) sectors all punched new highs. That turned out to be the high-water mark for the tech heavy NASDAQ as investors rotated out of big cap tech and into cyclical names on valuation concerns the remainder of the week. On Thursday, the first uptick in New Jobless Claims since March sent the major averages sharply lower again, with more selling in the FANG names, and the NASDAQ tumbled 244.71-points (-2.29%), its worst one-day percentage loss since 6/26. Biotech also weighed on the NASDAQ with the iShares NASDAQ Biotechnology ETF (IBB) sinking -5%. Despite a leader in the race for a Covid-19 vaccine, shares of Moderna (MRNA) sank -22% on copyright concerns. A -15% drop in Intel (INTC) on disappointing guidance on Friday sealed a second-straight negative week for the NASDAQ. Gold and silver remained strong with gold hitting $1900 an ounce on Friday for the first time since 2011. Silver hit its highest level since 2016. Crude oil prices also nudged higher as OPEC hinted at production cuts. The market’s make-up was mixed with Energy (XLE), Financials (XLF), Consumer Discretionary (XLY) and Consumer Staples (XLP) finishing with solid gains, while Technology (XLK), Communication Services (XLC) and Healthcare (XLV) all finished in the red. The major averages drifted lower again on Friday after comments from Dr. Fauci, a member of the White House coronavirus task force, mentioned that some southern states may have to slowdown reopening’s and questioning the safety of indoor restaurants and air travel. Friday’s selloff snapped a three-week win streak for the Dow, S&P 500 and Russell 2000.
For the period, the DJIA shed 202.06 points (-0.8%) to close at 26469.89. The S&P 500 outperformed easing 9.10 points (-0.3%) and finished at 3215.63. The NASDAQ dropped 140.01 points (-1.3%) to 10363.18, while the small cap Russell 2000 gave up 5.77 points (-0.4%) and settled at 1467.55.
Market Outlook: The technical condition of the market deteriorated this week with some of the technical indicators slipping into neutral ground and MACD, which identifies the short-term trend, negative for the NASDAQ and the Philadelphia Semiconductor Index. Momentum, as measured by the 14-day RSI, is neutral for most of the major averages, but is slowing. Despite this week’s pullback, support at the 200-day moving average (MA) remains in place, but this area will be watched carefully if the different indexes continue to consolidate next week. Several sector ETFs were able to hit new highs on Monday but Industrials (XLI), which should be picking up sponsorship in this rotation, continued to struggle at its 200-day MA.
Breadth was mixed this week but the NYSE Advance/Decline line hit new record highs on Tuesday and Wednesday, and the NASDAQ A/D line hit several recovery highs during the week showing stocks were under accumulation despite the indexes trading lower.
Finally, despite the back and forth trading during the period, the major averages went into Friday overbought by several measures and some healthy consolidation was in order. More than 70% of the stocks followed by Market Edge were trading above their respective 50-day MA which is a red flag for traders, and the S&P Short Range Oscillator hit +5.67% at Thursday’s close, which historically leads to some sideways to lower pricing.
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.
Presently the CTI is Positive at +2, 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 C, D and E are bullish, while Cycles A and B are bearish. While we could see some sideways action over the next few weeks, cycles A and B are projected to reset to Bullish the first week of August indicating the market should remain strong into the fall.
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 +7, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 641 units while the number of new 52-week highs out did the new lows on all five days. Breadth was mixed at the NASDAQ as the A/D line lost 1657 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 increased to 72.5% vs. 71.9% the previous week, while those above their 200-day moving average rose to 46.9% vs. 43.3%. 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. In addition, we track money flows into and out of Equity Funds and ETFs which as of 7/22/20 shows outflows of -800 million. Currently, the Sentiment Index is Negative at -2, unchanged 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): | 2 | 2 | Positive | ||||||
| Momentum Index: | 7 | 7 | Positive | ||||||
| Sentiment Index: | -2 | -2 | Negative | ||||||
| Strength Index – DJIA (DIA): | 79.3 | 62.1 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 62.2 | 51.0 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 75.5 | 61.7 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 26469.89 | 26671.95 | -0.8% | ||||||
| S&P 500 Index: | , | 3215.63 | 3224.73 | -0.3% | |||||
| NASDAQ Composite Index: | 10363.18 | 10503.19 | -1.3% | ||||||
Ask Mr. Seifert
Question: When trading the ‘Traders Strategies’, how much time is required during the week to monitor the positions?
Answer: Unlike just about every other short-term option trading system, the Optionomics’ ‘Traders Strategies’ are mostly a ‘set it and forget it’ proposition. After checking for new selections on the web site, you simply enter a limit order at the suggested open price posted on the site and then check later on to see if your order was filled. From there you can either enter a limit order to close the position at the ‘Quick Target Price’ or whenever you want to close the position or wait until Friday at around 3:00 pm to take action. One of four things will usually happen:
- The position will be closed if your target price is hit. Your profit will be the difference between the initial credit received and the target price.
- The position goes your way meaning the underlying stock closes at or above (bull) or at or below (bear) your short option position. Your profit will be the amount of the credit you received when you opened the trade.
- The position goes against you by a small amount. Your profit will be the amount of the credit you received when you opened the position minus the amount that the stock closes in the money.
- The position goes against you by a big amount resulting in a limited loss. Your loss will be the difference between the spread’s strike prices and the credit you received when you opened the trade.
There you have it. As you can see, you should have a profitable trade in three of the four possible scenarios. The time required once the position is open should be limited. However, you may have to be on your toes on Friday afternoon around 3:00.
‘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: | 07/24/20 | 3215.63 | S&P 500: | 07/24/20 | 3215.63 | ||
| S&P 500 Points Gain/Loss: | 729.89 | S&P 500 Points Gain/Loss: | 624.53 | ||||
| S&P 500 % Gain/Loss: | 29.4% | S&P 500 % Gain/Loss: | 24.1% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $7,104 | Optionomics Covered Call $ P/L: | $31,783 | ||||
| Optionomics Traders % P/L: | 35.5% | Optionomics Covered Call % P/L: | 31.8% | ||||
| Last Week’s Traders % P/L: | 0.9% | Last Week’s Covered Calls % P/L: | 0.0% | ||||
| 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: | 07/24/20 | 3215.63 | S&P 500: | 07/24/20 | 3215.63 | ||
| S&P 500 Points Gain/Loss: | 342.76 | S&P 500 Points Gain/Loss: | 308.22 | ||||
| S&P 500 % Gain/Loss: | 11.9% | S&P 500 % Gain/Loss: | 10.6% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $20,744 | Optionomics Billionaire Trade $ P/L: | $6,226 | ||||
| Optionomics Put-Call Hedge % P/L: | 20.7% | Optionomics Billionaire Trade % P/L: | 361.1% | ||||
| Last Week’s Put-Call Hedge % P/L: | 0.0% | Last Week’s Billionaire Trade % P/L: | -3.6% | ||||
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