Covid-19 Vaccine Sends S&P 500 to New High
CNBC has revised their Option Action show which is aired every weekday night at 5:30. They have really beefed up the Friday show to the point that we think it is one of the best option oriented shows on the air. Check it out.
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Global markets surged to start the week on news that Pfizer (PFE) and AstraZeneca’s (AZN) vaccine for Covid-19 was found to be more than 90% effective in ongoing trials. Investors cheered the news and sent the major averages to new intraday highs on Monday and then consolidated those gains during the week before making a run at new highs again on Friday. Economically sensitive stocks outperformed as investors rotated out of high-flying technology shares and into beaten down manufacturing, financial, travel and leisure stocks. Small caps outperformed as several Fed President’s speculated that the economy would recover much faster than expected. Leading the gains was a +17.18% spike in the Energy (XLE) sector on hopes that a vaccine would spark more driving. Oil refinery stocks Valero Energy (VLO) jumped +33.4% and Phillips 66 (PSX) gained +25.8%. Financials (XLF) rose +8.3% led by regional banks. The SPDR Regional Banks ETF (KRE) increased +13.9%. Technology (XLK) was the only sector to finish with a small loss on the rotation into cyclicals. Earnings continued to come in better than expected but forward guidance was cloudy due to increasing coronavirus cases globally and the potential for more restrictions over the near-term. Interest rates moved higher with the yield on the 10-year Treasury finishing the period at .90%, while gold prices tumbled back below the $1900 level. The S&P 500 punched a new record closing high on Friday, and along with the DJIA, finished up for a second straight week, while the tech heavy NASDAQ closed with a marginal loss on the rotation out of tech.
For the period, the DJIA jumped 1156.41 points (+4.1%) and closed at 29479.81. The S&P 500 gained 75.71 points (+2.2%) and settled at 3585.15. The NASDAQ lost 65.94 points (-0.6%) to 11829.29, while the small cap Russell 2000 surged 99.88 points (+6.1%) and finished at 1744.04.
Market Outlook:The technical condition of the market improved last week as the major averages touched new intraday highs before finishing the period mostly higher. The technical indicators remain positive with MACD ST confirming the bullish trend and momentum, as measured by the 14-day RSI, positive for the different indexes. The DJ Transportation Index and small cap Russell 2000 are outperforming the broader market, which is a plus going forward, and that leadership should continue as small caps historically outpace large caps going into the end of the year. Adding to the bullish outlook were new highs put in this week by Consumer Discretionary (XLY), Healthcare (XLV), Consumer Staples (XLP), Industrials (XLI) and Materials (XLB) sectors. In addition, Financials (XLF) gapped higher and hit a new recovery high. Finally, the VIX, which is regarded as a fear factor for traders, also dropped back below the 25 level which should make investors more comfortable with rising prices.
The stock market did finish overbought however, with the S&P Short Range Oscillator (SRO) at +8.44% on Friday. Readings this high usually lead to some consolidation in prices. Furthermore, the S&P 500 closed the week more than 14% above its 200-day moving average (MA). The last time the index was that stretched above that MA was the first week of September. Lastly, negative divergence is showing in some of the indicators for the NASDAQ and Philadelphia Semiconductor Index (SOX). While this doesn’t necessarily mean that we could see further weakness in technology, it may be hinting that tech shares could underperform going forward and is supportive that cyclicals should lead the market going forward.
Breadth was positive and the NYSE Advance/Decline line, a leading indicator of market direction, punched several new all-time highs during the week. Also, on Monday, New 52-week Highs surged to 345 on the NYSE and 401 on the NASDAQ showing broader participation in the rally.
Sentiment, however, is frothy and some of the indicators have reached extreme levels. The American Association of Individual Investors (AAII) showed 55.8% of retail investors are bullish on the stock market. That is the highest mark since January 2018 after tax cuts. The DJIA hit a record high two-weeks later before dropping -10.4% two weeks after that. In addition, institutional investors are too bullish according to the NAAIM and the Percentage of Bullish Advisors. These indicators tend to be contrarian signals when they reach extreme levels, like now, and call for caution over the short-term.
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 +14, up 16 notches from the previous week. Cycles A, B, C, D and E are bullish. Last week’s reversal in the market after the election led to a reset of the CTI and the week ending 10/30/20 was the bottom of this cycle even though the cycles were short. That projects a Bullish market cycle into the first of the year.
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 +0, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line jumped 3258 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 2782 units while the number of new highs beat the new lows on each session. Finally, the percentage of stocks above their 50-day moving average jumped to 76.2% vs. 67.7% the previous week, while those above their 200-day moving average rose to 77.6% vs. 68.9%. 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 11/11/20 shows inflows of $23.8 billion. That’s the largest inflow of funds since the week ending 12/29/2017. Currently, the Sentiment Index is Negative at -4, down four 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 11/13/2020 (DJIA – 29479.81). 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): | 14 | -2 | Positive | ||||||
| Momentum Index: | 0 | -1 | Neutral | ||||||
| Sentiment Index: | -4 | 0 | Negative | ||||||
| Strength Index – DJIA (DIA): | 55.2 | 31.0 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 54.6 | 31.6 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 59.1 | 38.3 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 29479.81 | 28323.40 | 4.1% | ||||||
| S&P 500 Index: | , | 3585.15 | 3509.44 | 2.2% | |||||
| NASDAQ Composite Index: | 11829.29 | 11895.23 | -0.6% | ||||||
Ask Mr. Seifert
Why do I lose money when I buy cheap puts and calls and I am right on my market direction call?
I am asked this question all the time. You are sure that Goldman Sachs (GS) is going to report earnings/revenues and you feel that the stock is going to rally. You decide that the best leverage is to buy out of the out of the money calls. They are cheap, only $0.50 cents and you think you will at least double your money. Right? Wrong! First, there are no cheap out of the money puts and calls. They are priced off the current At The Money Straddle and all market participants are aware of their value. Remember that for every option trade there must be a buyer for every seller and vice versa. So, when you buy that $0.20 delta cheap call you must be right in two ways. The price must go in your direction and it must be greater than premium you paid for the option’s strike price. The number comes out and you were right GS rallies $15 but your $0.20 call actually goes down in value! You are shocked and blame everyone but yourself. Here is what you need to do. First learn how the option model works. Second use strategies that will protect you when your price direction is correct. I can assure you that it is not buying cheap calls. Stop playing a game that you can’t win and learn how to use options to enhance your winners, not take them away. I think that you will agree that nothing in trading or investing is more frustrating than being right in the market only to lose your money.
‘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: | 11/13/20 | 3585.15 | S&P 500: | 11/13/20 | 3585.15 | ||
| S&P 500 Points Gain/Loss: | 1099.41 | S&P 500 Points Gain/Loss: | 994.05 | ||||
| S&P 500 % Gain/Loss: | 44.2% | S&P 500 % Gain/Loss: | 38.4% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $7,682 | Optionomics Covered Call $ P/L: | $30,000 | ||||
| Optionomics Traders % P/L: | 38.4% | Optionomics Covered Call % P/L: | 30.0% | ||||
| Last Week’s Traders % P/L: | 1.4% | 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: | 11/13/20 | 3585.15 | S&P 500: | 11/13/20 | 3585.15 | ||
| S&P 500 Points Gain/Loss: | 712.28 | S&P 500 Points Gain/Loss: | 677.74 | ||||
| S&P 500 % Gain/Loss: | 24.8% | S&P 500 % Gain/Loss: | 23.3% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $31,646 | Optionomics Billionaire Trade $ P/L: | $208,479 | ||||
| Optionomics Put-Call Hedge % P/L: | 31.6% | Optionomics Billionaire Trade % P/L: | 417.0% | ||||
| Last Week’s Put-Call Hedge % P/L: | 0.3% | Last Week’s Billionaire Trade % P/L: | 5.9% | ||||
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.
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 and a video which includes detailed explanations and sample recommendations. 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 Reversal 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. You can subscribe to either the Traders or the Investors 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 monthly 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
|