Small Caps Lead Market Higher
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Investors shook off last week’s volatility, brought on by speculative short trading, and returned their focus to stimulus, vaccines and earnings this week. The result was new record highs as the major averages turned in their best percentage gains since November. Blow out earnings from Amazon (AMZN), Alphabet (GOOGL), PayPal (PYPL) and others led to the S&P 500 and DJIA moving higher each day of the week in broad based buying that left every sector in the green. An +8.24% spike in Energy (XLE) led the rally, while Communication Services (XLC), Financials (XLF), Consumer Discretionary (XLY), Industrials (XLI) and Technology (XLK) also outperformed, up close to +5% or better for the week. Economic reports were also better than expected as manufacturing data and construction spending topped estimates. A drop to a two-month low in Initial Jobless Claims on Thursday helped boost stock prices and increase yields and the yield on the 10-year and 30-year Treasury Bills reached their highest level since February 2020. the 30-year T-Bill closed Friday at +1.98%. Commodities rallied and the Invesco DB Commodity Index (DBC) and crude oil prices hit their highest mark since January 2020 on hopes of an uptick in reopening’s in the coming months. Copper prices hit an eight-year high, hinting that inflation concerns are mounting. As the period ended, Johnson & Johnson (JNJ) applied for emergency use authorization from the FDA to roll out its single-dose vaccine, and Congress was on the brink of passing its long awaited coronavirus relief package. That kept the S&P 500, NASDAQ and Russell 2000 at new record highs and the DJIA not far behind.
For the period, the DJIA gained 1165.62 points (+3.9%) and closed at 31148.24. The S&P 500 added 172.59 points (+4.6%) and settled at 3886.83. The NASDAQ jumped 785.61 points (+6.0%) to 13856.30, while the small cap Russell 2000 surged 159.69 points (+7.7%) finishing at 2233.33.
Market Outlook:The technical condition of the market improved last week as the major averages turned in their best weekly performance since November. The technical indicators reversed course and pushed back into positive territory with MACD, which gauges the short-term trend, crossing back into bullish ground for the different indexes and Momentum, as measured by the 14-day RSI, also in positive territory. The DJ Transportation Index and small cap Russell 2000, which tend to lead a healthy rally, outperformed, with the Russell 2000 surging +7.7% to lead the advance. Underlying breadth was strong with the NYSE and NASDAQ Advance/Decline lines both hitting new recovery highs and new 52-week highs expanding on both indexes. Investor sentiment still shows some complacency but has backed off extreme levels of bullishness that had been seen in the previous weeks. That may indicate that the previous week’s turmoil caught the attention of traders and could lead to less volatility over the short-term. This is backed by a 43% drop in the VIX off last Wednesday’s spike.
At this stage it appears that the previous selloff to close January was completed with the target of 3700 on the S&P 500 reached on 1/29/21. Only a drop below 3694 this coming week would indicate that the market is due for a bigger pullback. With stimulus talks showing progress, vaccine inoculations beginning to pick up the pace and earnings beating estimates and including positive forward guidance, the major averages could be poised for a melt up that would take the S&P 500 to 3950 over the next few weeks.
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 +2, unchanged from the previous week. Cycles A, C, D and E are bullish, while Cycle B is bearish. It now appears that Cycle A and B may have bottomed the week of 1/29/21. As long as 3694 on the S&P 500 holds this coming week the CTI will remain in a Bullish configuration for several more weeks.
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 three notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 6567 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line added 8049 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 75.5% vs. 66.2% the previous week, while those above their 200-day moving average increased to 89.8% vs. 88.8%. 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 2/03/21 shows outflows of $11 billion. Currently, the Sentiment Index is Negative at -2, down a notch 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): | 2 | 2 | Positive | ||||||
| Momentum Index: | 7 | 4 | Positive | ||||||
| Sentiment Index: | -2 | -1 | Negative | ||||||
| Strength Index – DJIA (DIA): | 24.1 | 24.1 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 33.3 | 43.8 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 30.1 | 36.6 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 31148.24 | 29982.62 | 3.9% | ||||||
| S&P 500 Index: | , | 3886.83 | 3714.24 | 4.6% | |||||
| NASDAQ Composite Index: | 13856.30 | 13070.69 | 6.0% | ||||||
| **Connotation is Positive or Negative Divergence from the DJIA | |||||||||
Ask Mr. Seifert
What is the VIX Index and how is it calculated?
VIX is the ticker symbol for the CBOE’s volatility index. It shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. It is a widely used measure of market risk and is also referred to as the “investor fear gauge”.
The CBOE designed the VIX to create various volatility products. VIX was the first successful attempt at creating and implementing such an index. Introduced in 1993, it was originally a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, in 2004, it was expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors’ expectations of future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility because of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent times in the markets.
VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option’s expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.
While there is not a way to directly trade the VIX, the CBOE does offer VIX options, which have a value based on VIX futures and not the VIX itself. Additionally, there are 24 other volatility exchange-traded products (ETPs) for the VIX, bringing the total number to 25.
‘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: | 02/05/21 | 3886.83 | S&P 500: | 02/05/21 | 3886.83 | ||
| S&P 500 Points Gain/Loss: | 1401.09 | S&P 500 Points Gain/Loss: | 1295.73 | ||||
| S&P 500 % Gain/Loss: | 56.4% | S&P 500 % Gain/Loss: | 50.0% | ||||
| Risk Capital: | $15,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $9,399 | Optionomics Covered Call $ P/L: | $31,240 | ||||
| Optionomics Traders % P/L: | 69.4% | Optionomics Covered Call % P/L: | 31.2% | ||||
| Last Week’s Traders % P/L: | 1.9% | 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: | 02/05/21 | 3886.83 | S&P 500: | 02/05/21 | 3886.83 | ||
| S&P 500 Points Gain/Loss: | 1013.96 | S&P 500 Points Gain/Loss: | 979.42 | ||||
| S&P 500 % Gain/Loss: | 35.3% | S&P 500 % Gain/Loss: | 33.7% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $39,776 | Optionomics Billionaire Trade $ P/L: | $252,791 | ||||
| Optionomics Put-Call Hedge % P/L: | 39.8% | Optionomics Billionaire Trade % P/L: | 505.6% | ||||
| Last Week’s Put-Call Hedge % P/L: | 0.6% | Last Week’s Billionaire Trade % P/L: | 7.0% | ||||
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