Stock Market Rally Heats Up
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages powered higher this week with the NASDAQ and NASDAQ 100 hitting new all-time highs, while the S&P 500, DJ Transportation Index and small cap Russell 2000 traded at new recovery highs. Ongoing hopes that a vaccine for Covid-19 would be available by year’s end, another trillion dollar stimulus package set to be completed possibly over the weekend, and for the most part, better than expected earnings and forward guidance kept investor sentiment positive. In addition, jobs data came in better than expected with the unemployment rate falling to 10.2% on Friday with new jobless claims the lowest since March. The market rally was broad based with every sector finishing in the plus column led by gains in Industrials (XLI), Financials (XLF), Energy (XLE), Communication Services (XLC) and Technology (XLK), all up more than 3%. Propped up by vaccine hopes and consumers ready to escape home quarters, the airlines, hotels and casinos were some of the best performing industry groups. Rate sensitive sectors got a boost from sinking yields and the 30-year mortgage hit a record low yield falling to 2.8%. Continued weakness in the US dollar gave a boost to commodities and crude oil prices as well as precious metals. Gold touched a record high after surging through the $2000 an ounce level, while silver jumped more than +20% for the period as investors kept an eye on heightened tensions between the US and China. Some rotation out of technology names and into cyclical stocks continued as economic data improved, but gains in big cap tech stocks showed investors were still looking for high growth. Despite Congress failing to pass a coronavirus relief package on Friday, the DJIA snapped a two week losing streak and turned in its best weekly percent gain since the first week of June, while the S&P 500 finished the period about 1% below its all-time closing high.
For the period, the DJIA rode strength in Apple Inc (AAPL) and Walt Disney (DIS) to a gain of 1005.16 points (+3.8%) and closed at 27433.48. The S&P 500 moved higher for a second straight week adding 80.16 points (+2.5%) and settled at 3351.28. The NASDAQ picked up 265.71 points (+2.5%) to 11010.98, while the small cap Russell 2000 jumped 88.75 points (+6.0%) and finished at 1569.18.
Market Outlook:The technical condition of the market improved this week as the different indexes traded higher each day. The technical indicators are bullish with momentum, as measured by the 14-day RSI, strong. The market did finish the period overbought however, with the S&P Short Range Oscillator (SRO) at +4.7%. The DJ Transportation Index and small cap Russell 2000 outperformed the broader market with both indexes up close to +6% on the week. Market technicians like to see these indexes lead the market. The Philadelphia Semiconductor Index (SOX) hit a record high this week after gaining +2.0%, with shares of NVIDIA (NVDA) and Advanced Micro Devices (AMD) leading the way. The market rally was supported by underlying strength in internal breadth as the NYSE Advance/Decline line, a leading indicator of market direction, hit several new highs and the NASDAQ A/D line hit new recovery highs showing more stocks participating in the rally. The number of stocks making new 52-week highs also continued to expand which is bullish. 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 +13, up 11 notches from the previous week. Cycles A, B, C, D and E are bullish. The CTI is projected to stay positive into September.
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, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 3559 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 gained 3616 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 69.2% vs. 65.5% the previous week, while those above their 200-day moving average increased to 51.1% vs. 48.1%. 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 8/06/20 shows outflows of -$7.2 billion. 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): | 13 | 2 | Positive | ||||||
| Momentum Index: | 7 | 6 | Positive | ||||||
| Sentiment Index: | -2 | -2 | Negative | ||||||
| Strength Index – DJIA (DIA): | 17.2 | 48.3 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 22.4 | 36.7 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 27.7 | 56.4 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 27433.48 | 26428.32 | 3.8% | ||||||
| S&P 500 Index: | , | 3351.28 | 3271.12 | 2.5% | |||||
| NASDAQ Composite Index: | 11010.98 | 10745.27 | 2.5% | ||||||
Ask Mr. Seifert
Question: What is exercise and assignment and how does this come into play when trading the Optionomics’ strategies?
Answer: When you short (sell) an option (put or call), there exist the possibility that you could be obligated to buy (short put) or sell (short call) the shares of the underlying stock on any business day. This is known as assignment. When you are long an option (put or call), you have the right to exercise your option and either buy (long call) the underlying stock away from the owner or sell (long put) the stock to the guy that sold you the put option at the specified strike price. Options can be exercised anytime before the expiration date. One can never tell when an assignment will take place. Options are usually exercised when they get closer to expiration. The reason is that it does not make much sense to exercise an option when there is still time value left. It is usually more profitable to sell the option instead. Over the years, only about 17% of options have been exercised. However, it does not mean that only 17% of your short options will be exercised. Many of those options that were not exercised were probably out-of-the-money to begin with and had expired worthless. In any case, at any point in time, the deeper into-the-money the short options, the more likely they will be exercised.
All of the Optionomics’ strategies involve the sale of some sort of weekly credit spread which results in you being long and short either a put or a call. This ensures that you have unlimited risk since you never will be selling naked options. Most of the spreads will either expire worthless on the expiration date resulting in no action and a 100% winner. Sometimes they will settle with a small or a full loss which may require some action on your part. This could be simply closing the spread before expiration or you may be assigned your short option and having to exercise the long option in the spread to zero out the position.
‘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: | 08/07/20 | 3351.28 | S&P 500: | 08/07/20 | 3351.28 | ||
| S&P 500 Points Gain/Loss: | 865.54 | S&P 500 Points Gain/Loss: | 760.18 | ||||
| S&P 500 % Gain/Loss: | 34.8% | S&P 500 % Gain/Loss: | 29.3% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $7,021 | Optionomics Covered Call $ P/L: | $32,271 | ||||
| Optionomics Traders % P/L: | 35.1% | Optionomics Covered Call % P/L: | 32.3% | ||||
| Last Week’s Traders % P/L: | -0.8% | Last Week’s Covered Calls % P/L: | 0.2% | ||||
| 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: | 08/07/20 | 3351.28 | S&P 500: | 08/07/20 | 3351.28 | ||
| S&P 500 Points Gain/Loss: | 478.41 | S&P 500 Points Gain/Loss: | 443.87 | ||||
| S&P 500 % Gain/Loss: | 16.7% | S&P 500 % Gain/Loss: | 15.3% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $22,148 | Optionomics Billionaire Trade $ P/L: | $6,536 | ||||
| Optionomics Put-Call Hedge % P/L: | 22.1% | Optionomics Billionaire Trade % P/L: | 379.1% | ||||
| Last Week’s Put-Call Hedge % P/L: | 1.7% | Last Week’s Billionaire Trade % P/L: | 21.9% | ||||
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Mr. Seifert