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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Major Averages Post Record Highs
The major averages punched new record highs this week as progress in stimulus talks over the previous weekend fed bullish investor sentiment. The Dow Jones carried a five-day win streak into Monday and opened the period with a 237.52-point (+0.76%) jump and left the DJIA, S&P 500, NYSE, NASDAQ and Russell 2000 at all-time highs. Fed Chief Jerome Powell helped stoke stock prices higher midweek when he reiterated that the Federal Reserve was going to keep an accommodative monetary policy to battle the Covid-19 slowdown and keep interest rates lower despite inflationary pressures. Powell’s comments pushed rates higher with the yield on the 3-year Treasury finishing at 2.01%, while the 10-year T-bill yield hit 1.20%. The US Dollar moved lower giving a boost to commodities and emerging markets. The iShares Emerging Markets ETF (EEM) closed the week in record territory. Crude oil prices hit their highest level since February 2020, while copper prices, a leading indicator of economic activity, reached an eight-year high. Energy (XLE) continued to be the best performing sector and is up +14.7% since its 1/29/21 low. Technology (XLK), Communication Services (XLC) and Financials (XLF) also outperformed up more than +2.0%. Technology got a boost from a spike in semiconductors as the Philly Semiconductor Index soared +7.9% on reports of chip shortages. Earnings continued to come in above estimates with Twitter (TWTR) and Walt Disney Co. (DIS) blowing away consensus numbers, but trading mixed on the results. According to FactSet Research, 81% of S&P 500 reporting Q4 earnings have delivered an upside surprise. If that holds up, it will tie the mark for the second-highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. After hitting new highs early in the week the different indexes were overbought by several measures, before back and forth trading to close out the period helped the market work off that condition. The major averages finished on a two-week win streak fueled by strong earnings, vaccine rollouts and stimulus progress and investors looked forward to more reopening’s. That should keep equity prices leaning forward a while longer.
For the period, the DJIA gained 310.16 points (+1.0%) and closed at 31458.40. The S&P 500 added 48.00 points (+1.2%) and settled at 3934.83. The NASDAQ picked up 239.17 points (+1.7%) to close at 14095.47, while the small cap Russell 2000 jumped 56.03 points (+2.5%) finishing at 2289.36.
Market Outlook:The technical condition of the market improved last week as the major averages finished positive for a second-straight week, hitting new all-time highs. The technical indicators are in positive ground and momentum, as measured by the 14-day RSI, strong. The gains off the January lows have been led by the DJ Transportation Index, small cap Russell 2000 and the Philadelphia Semiconductor Index, which bodes well for the stock market going forward. Market technicians would prefer to see these indexes lead the market higher. Sectors hitting new highs during the period include Technology (XLK), Communication Services (XLC), Consumer Discretionary (XLY) and REITs (XLRE), with Energy (XLE) hitting its highest mark since June. Those are all growth sectors showing investors are counting on improved economic activity in the coming quarters. Underlying breadth is bullish with the NYSE and NASDAQ Advance/Decline lines confirming that the rally is broad based with the majority of stocks under accumulation. New 52-week highs, especially on the NASDAQ, showed solid expansion and volume on the NASDAQ was close to record highs. Investor sentiment however is moving closer to an extreme bullish reading. The National Association of Active Investment Managers (NAIIM) jumped from 79.2% market exposure to 110.3% this week meaning professional investors are back on margin. In addition, the American Association of Individual Investors (AAII) show that retail investors are getting close to 2:1, Bulls vs. Bears.
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 +12, up 10 notches from the previous week. Cycles A, B, C, D and E are bullish. It now appears that Cycle A and B bottomed the week of 1/29/21 resetting the CTI to a Bullish +12. That will keep the CTI 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 +9, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2079 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 2474 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 jumped to 80.3% vs. 75.5% the previous week, while those above their 200-day moving average increased to 90.4% vs. 89.8%. 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 2/10/21 shows inflows of $25.9 billion. Currently, the Sentiment Index is Negative at -4, down two 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.
Ask Mr. Seifert
Question: Is there anywhere on the Optionomics web site where I can get a short description of the ‘Traders’ and ‘Investors’ strategies?
Yes there is. It is called Quick Take. When you retrieve any of the selections from either the “Traders’ or ‘Investor’ drop downs on the home page there is a brief description of the trade and a Summary section which details the desired results of the trades. An example of a Quick Take for the One-Day Wonder Bullish and Bearish Trades follows:
Quick Take: One-Day Wonder – Bullish Trade
Time Frame: One Day.
Underlying Stock: Bullish Market Edge Opinion – No Stock Position.
Desired Stock Price Direction: Up.
Option Position: Long Deferred ATM -1or -2 Call – Short Expiring ATM +1 or +2 Call.
Maximum Risk: Initial debit spread amount.
Summary: The stock performs as anticipated. The premium (air) is the short expiring call goes to zero while the long deferred call gains additional premium.
Quick Take: One-Day Wonder – Bearish Trade
Time Frame: One Day.
Underlying Stock: Bearish Market Edge Opinion – No Stock Position.
Desired Stock Price Direction: Down.
Option Position: Long Deferred ATM +1 or +2 Put – Short Expiring ATM -1 or -2 Put.
Maximum Risk: Initial debit spread amount.
Summary: The stock performs as anticipated. The premium (air) in the short expiring put goes to zero while the long deferred put gains additional premium.
‘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: | 02/12/21 | 3934.93 | S&P 500: | 02/12/21 | 3934.93 | ||
| S&P 500 Points Gain/Loss: | 1449.19 | S&P 500 Points Gain/Loss: | 1343.83 | ||||
| S&P 500 % Gain/Loss: | 58.3% | S&P 500 % Gain/Loss: | 51.9% | ||||
| Risk Capital: | $15,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $10,547 | Optionomics Covered Call $ P/L: | $31,240 | ||||
| Optionomics Traders % P/L: | 70.3% | Optionomics Covered Call % P/L: | 31.2% | ||||
| 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: | 02/12/21 | 3934.93 | S&P 500: | 02/12/21 | 3934.83 | ||
| S&P 500 Points Gain/Loss: | 1062.06 | S&P 500 Points Gain/Loss: | 1027.42 | ||||
| S&P 500 % Gain/Loss: | 37.0% | S&P 500 % Gain/Loss: | 35.3% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $39,662 | Optionomics Billionaire Trade $ P/L: | $266,834 | ||||
| Optionomics Put-Call Hedge % P/L: | 39.7% | Optionomics Billionaire Trade % P/L: | 533.7% | ||||
| Last Week’s Put-Call Hedge % P/L: | -0.1% | Last Week’s Billionaire Trade % P/L: | 28.1% | ||||
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