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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Volatile Week Winds Up Mixed
Equities roared into the month of March on news that the House of Representatives had passed the $1.9 trillion coronavirus relief package up to the Senate, and Johnson & Johnson (JNJ) had received FDA Emergency Use Authorization for their one-dose Covid-19 vaccine over the weekend. The party was short lived however, as the bull was bowled over by a spike in interest rates and tumbled into Friday. The bounce ahead of the weekend left the DJIA, S&P 500 and DJ Transportation Index in positive territory but the NASDAQ and small cap Russell 2000 finished down for a third consecutive week on weakness in tech shares. Despite Fed Chair Jerome Powell’s dovish comments on inflationary pressures and the strength of the economy, rates on the 10 and 30-year Treasury Bills continued to step higher and rocked momentum sectors. Stronger than expected economic data showed manufacturing and jobs creation picking up the pace and the yield on the 10-year T-Bill hit 1.64% before settling at 1.55%, while the 30-year T-Bill topped out at 2.35% before closing at 2.28% on Friday. The US Dollar trekked higher, hitting its highest level since early December 2020, while the prospects of increasing growth, coupled with OPEC declining to increase production, sent crude oil prices above $66 a barrel, their highest price going back to 2018. There were pockets of strength in the market however, as rotation out of big cap technology, stay at home, and high P/E momentum plays benefited cyclical and reopening stocks. The Energy (XLE) sector closed higher for a fifth straight week, surging +10.0%, hitting a new recovery high as Chevron (CVX) and Exxon Mobil (XOM) hit new 52-week highs. Financials (XLF) also outperformed as the yield curve steepened and the SPDR Financial ETF (XLF) punched a new record high. Shares of JP Morgan Chase (JPM), Bank of America (BAC) and Citigroup (C) all hit new highs. On the flip side, Technology (XLK) and Consumer Discretionary (XLY) under performed and both sectors were in a correction midday on Friday, down more than -10% off their highs. The drop in the tech heavy NASDAQ and S&P 500 had erased the year-to-date gains during the week, but Friday’s surge brought the indexes back into the plus column for the year by the close. The bookend sessions to open and close the week left the Dow higher for the fourth time in five weeks and off -1.4% from its record high set the previous week.
For the period, the DJIA gained 563.93 points (+1.8%) and closed at 31496.30. The S&P 500 picked up 30.79 points (+0.8%) and settled at 3841.94. The NASDAQ lost 272.20 points (-2.1%) to close at 12920.15, while the small cap Russell 2000 eased 8.84 points (-0.4%) finishing at 2192.21.
Market Outlook:The technical condition of the market deteriorated last week as the major averages were battered once again by rising rates but finished mixed. Most of the major averages broke support during the period at their 50-day moving average (MA) but a bounce on Friday left the DJIA, S&P 500 and Russell 2000 back above that level. The NASDAQ broke below its 100-day MA but, along with the Philly Semiconductor Index (SOX), was able to close Friday back above it. Positive divergence was seen in the DJ Transports as the index outperformed and closed the period three-points below its record high. The technical indicators finished mixed with MACD, which gauges trend strength, bearish for the different indexes while Momentum, as measured by the 14-day RSI, neutral except for the NASDAQ. The selloff in the NASDAQ left its Fast Stochastic in the single digits briefly on Friday, its lowest read since the March 2020 bottom, before the week ending bounce. Underlying breadth was mixed but remained above levels that would indicate panic selling setting in. The NYSE Advance/Decline line, which is a leading indicator of market direction, was positive for the period, but the NASDAQ A/D line has nudged lower for three weeks. Finally, the number of new 52-week highs contracted during the period but are still showing solid participation and that stocks for the most part are under accumulation. New 52-week lows expanded but some of that is due to rate sensitive closed end bond funds and preferred stocks showing up on the list. Investor sentiment has been reined in and is at the most neutral number since the market bottomed in late January.
The speed of the ascent in rates caught investors by surprise the last two weeks and the contraction in valuations in high flying technology shares has been painful. At the same time, shares of oil related stocks and financial companies are hitting new highs after having underperformed the broader market since the March selloff. While it may be sending mixed signals to investors, this sector rotation is normal for an economy that is in early recovery. Sam Stovall, Chief Investment Strategist at CFRA, has done a study showing that during this period of the recovery, we should see Industrial Production rising, interest rates beginning to inch higher and the yield curve showing signs of steepening. Historically, Industrials (XLI) and Energy (XLE) begin to outperform as we get back to work, and Financials (XLF) move higher as demand for loans improves. Now that Covid-19 vaccines are being widely distributed and the latest coronavirus relief package is on the way, we are going to see economic conditions quickly recover, and it may overheat later in the year. Inflationary pressures will mount but the dovish monetary policy in place should keep stock prices moving higher for a while longer. When the Federal Reserve begins to ‘hint’ that short-term rates could be due for a bump, that will be the signal to take a step back and lighten up on the broader market. Until then, stay focused on the market Industry Groups that are benefiting from the reopening of the economy.
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, unchanged from the previous week. Cycles B, C, D and E are bullish, while Cycle A is bearish. The CTI is projected to remain in Bullish Territory into April. As mentioned earlier this year, it appeared that Cycle B bottomed the last week of January. The major averages rallied from that point to new highs but this week we saw that low taken out by the NASDAQ. The DJIA however, has stayed above that low. While it was noted that the January low resulted in back-to-back short cycle periods, only a breech of 29856.30 by the DJIA would abort that call. In addition, a reset of the CTI if that Dow low occured, would result in the CTI changing to a Bullish configuration over the next week or so. That implies that further downside is most likely limited here and that the major averages should trade higher over the next few 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 Neutral at -1, down a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 1321 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was mixed at the NASDAQ as the A/D line lost 2094 units while the number of new highs beat the new lows on four days. Finally, the percentage of stocks above their 50-day moving average fell to 52.6% vs. 64.6% the previous week, while those above their 200-day moving average eased to 82.9% vs. 85.7%. 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 3/03/21 shows inflows of $329 million. Currently, the Sentiment Index is Negative at -1, up 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: 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 trading system, the Optionomics’ ‘Traders Strategies’ can be 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 at the ‘quick target price’ or whenever you want, close the position or wait until Friday at around 3:00 pm to take action. One of four things will 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 trade minus the amount that the stock closes in the money.
- The position goes against you 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 without lifting a finger.
One thing shoud be noted. While a double is usually a good target for the directional trades, i.e. the Blow Offs and One Day Wonders, sometimes these positions can really take off. Case in point. The week ending 03/05/21 saw a Blow Off Top trade involving PYPL go from $6.83 to over $33.00, a $2600 gain as the stock fell from $271.14 to close at $239.05 on Friday. Such is life.
‘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: | 03/05/21 | 3841.94 | S&P 500: | 03/05/21 | 3841.94 | ||
| S&P 500 Points Gain/Loss: | 1356.20 | S&P 500 Points Gain/Loss: | 1250.84 | ||||
| S&P 500 % Gain/Loss: | 54.6% | S&P 500 % Gain/Loss: | 48.3% | ||||
| Risk Capital: | $15,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $10,868 | Optionomics Covered Call $ P/L: | $31,910 | ||||
| Optionomics Traders % P/L: | 72.5% | Optionomics Covered Call % P/L: | 31.9% | ||||
| Last Week’s Traders % P/L: | 6.6% | Last Week’s Covered Calls % P/L: | 0.7% | ||||
| 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: | 03/05/21 | 3841.94 | S&P 500: | 03/05/21 | 3841.94 | ||
| S&P 500 Points Gain/Loss: | 969.07 | S&P 500 Points Gain/Loss: | 934.53 | ||||
| S&P 500 % Gain/Loss: | 33.7% | S&P 500 % Gain/Loss: | 32.1% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $38,883 | Optionomics Billionaire Trade $ P/L: | $242,332 | ||||
| Optionomics Put-Call Hedge % P/L: | 38.9% | Optionomics Billionaire Trade % P/L: | 484.7% | ||||
| Last Week’s Put-Call Hedge % P/L: | 0.7% | Last Week’s Billionaire Trade % P/L: | -13.9% | ||||
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| 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.
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