Mr. Seifert Sez For The Week Of 03-15-21

by | Mar 14, 2021 | Mr. Seifert Sez

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).

Another volatile week ended with most of the major averages at new record highs as progress in vaccinations and the passing of the Covid-19 Stimulus Bill looked to hasten the reopening of the economy. A better than expected jobs report saw Initial Claims down 42k, JOLTS Job Openings hit its highest level in a year and Consumer Sentiment jump to 83.0, its best mark since March 2020. The promise of an economy ready to reopen faster than anticipated saw investors continue to pour funds into cyclical, travel and leisure stocks and the Consumer Discretionary (XLY) sector outpaced the broader market. While the DJIA carried a six-day win streak into the weekend, it was a different story for technology and the NASDAQ. Big cap tech names, FANG and high P/E growth names were hammered on Monday after interest rates ticked higher and the index tumbled 310.99 points (-2.41%). The tech heavy NASDAQ turned it around on Tuesday however, bouncing off oversold levels and rallied back to close above its 50-day moving average at the close on Thursday. The three-day spurt led to a 789.51-point (+6.11%) gain, but another uptick in rates on Friday stalled the run. The NASDAQ still managed to close out the week in positive ground bringing a three-week losing streak to an end. The market gains left every sector in the plus column with Consumer Discretionary (XLY), REITs (XLRE), Materials (XLB), Utilities (XLU), Industrials (XLI) and Financials (XLF) doing the heavy lifting, while Energy (XLE), Healthcare (XLV), Communication Services (XLC) and Technology (XLK) lagged the broader market. Interest rates ticked higher again on Friday as investors fretted that inflationary pressures would mount as the economy heated up later in the year. The yield on the 10-year Treasury closed at +1.626%, while the 30-year yield finished the period at +2.386%, its highest mark since November 2019. That steepened the yield curve giving a boost to banking shares and the SPDR Regional Banking ETF (KRE) punched a new record high, after spiking +38.5% since the start of the year. Crude oil prices moved higher on a bigger drawdown in stockpiles than expected, rising above $66 a barrel. That was last seen in October 2019. Despite the NASDAQ’s struggle, the Dow, S&P 500, NYSE, DJ Transportation Index and small cap Russell 2000 closed the period sitting at new record highs, supported by strong underlying breadth. The rally left the stock market overbought however, and the S&P Short Range Oscillator (SRO) ended the week at +5.95%. That could lead to some consolidation in the different indexes next week while investors balance improving economic growth with rising rates.

For the period, the DJIA soared 1282.34 points (+4.1%) and closed at 32778.64. The S&P 500 gained 101.40 points (+2.6%) and settled at 3943.34. The NASDAQ picked up 399.71 points (+3.1%) to close at 13319.86, while the small cap Russell 2000 spiked 160.58 points (+7.3%) finishing at 2352.79.

Market Outlook:The technical condition of the market improved last week as most of the major averages settled at new record highs. The exception was the NASDAQ which struggled with weakness in technology and high growth names as investors continued to rotate into Energy (XLE), Financials (XLF) and Industrials (XLI) in a switch to cyclical and reopening stocks. The technical indicators moved into bullish ground for most of the different indexes with MACD, a short-term trend gauge, bullish and Momentum, as measured by the 14-day RSI, positive. The NASDAQ is showing negative divergence with the different indicators in neutral ground. In addition, the NASDAQ ended the week trading back below its 50-day moving average (MA) along with the Philadelphia Semiconductor Index (SOX). On a positive note, the small cap Russell 2000 and DJ Transportation Index exhibited positive divergence and outperformed the other indexes which bodes well for the market going forward. Market technicians like to see these indexes show relative strength in leading the overall market higher. As mentioned, this week’s market strength was broad based, and Industrials (XLI), Materials (XLB), Financials (XLF), Communication Services (XLC), Energy (XLE) and REITs (XLRE) all hit new 52-week highs. Underlying breadth remains bullish and this week the NYSE Advance/Decline line, a leading indicator of market direction, recorded several new all-time highs. Despite recent weakness in the NASDAQ, its A/D line is close to a new recovery high showing the majority of NASDAQ stocks are under accumulation. The number of new 52-week highs is expanding and on Thursday, the NYSE recorded 511 new highs, the highest daily total since 2013 which shows broad leadership in the current rally. Finally, investor sentiment has moved closer to a neutral stance over the last two weeks as volatility has picked up, which is also a positive.

Economically sensitive stocks continue to gain momentum and despite the tech selloff, rotation into these sectors have offset the weakness in the overweighted big cap technology names. The ‘fly in the ointment’ however, remains the rapid rise in yields. As the economic reopening continues to pick up steam, yields are likely to nudge higher as inflationary pressures mount. The iShares 7-10 Year Treasury Bond ETF (IEF) is close to retracing 38.2% of the move from 10/18 to 7/20. If the 10-year T-Bill can find support there, the yield on the 10-year would rise to about 1.71% and probably mark a slowdown in the rally. A break of that support would open the door to a 50% retracement and put the yield on the 10-year T-Bill around +1.86%. While the stock market can probably weather a move to that level, it is likely to stall the current rally as we head into the summer until valuations can once again be adjusted. While I look for the major averages to nudge higher from here, keep an eye on the bond market. It is already giving hints that what goes up, must at some point, come down and we could be in for a rough summer. 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 +11, down a notch from the previous week. Cycles A, B, C, D and E are bullish. The CTI is projected to remain in Bullish Territory into April.

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 +2, up three notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 5032 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 5734 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 70.5% vs. 52.6% the previous week, while those above their 200-day moving average increased to 87.7% vs. 82.9%. 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 3/10/21 shows inflows of $14.8 billion. Currently, the Sentiment Index is Negative at -1, 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 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: How have the various Traders and Investors strategies performed since their inception?

Answer: The following details the published performance of the various strategies. These results are updated weekly and listed on the Optionomics site in the Scoreboard area.

Trading Strategies

  • All Four Trader’s Strategies
  • Suggested Risk Capital: $3,500 per strategy and one contract ($14,000).
  1. Holding Period: One to four days.
  2. Average number Of Trades/Week: Five – Six.
  3. Personal Time Requirements: One to three hours per week.
  4. Published Annualized Returns 35.4% based on of initial risk capital (01/04/19 – 03/05/21).*
  5. Published Win Percentage: 60%.**
  6. Risk Factors: Maximum loss can exceed potential profit & pin risk at expiration.***

Investor Strategies

  • 21st Century Covered Call Strategy:
  1. Suggested Capital Requirements: $10,000 per position – maximum of ten positions ($100,000).
  2. Holding Period: Eight weeks.
  3. Personal Time Requirements: One to three hours per week.
  4. Published Annualized Return: 9.3% based in $100,000 capital (11/06/17 – 03/05/21).
  5. Published Win Percentage: 59.3% (11/06/17 – 03/05/21)**
  6. Risk Factors: Dividend and pin risk at expiration.****
  • Low Cost Put Hege Strategy:
  1. Suggested Capital Requirements: $10,000 per position – maximum of ten positions ($100,000).
  2. Holding Period: Twelve weeks.
  3. Personal Time Requirements: One to three hours per week.
  4. Published Annualized Return: 12.4% based on $100,000 capital (01/26/18 – 03/05/21).*
  5. Published Win Percentage:52.0% ( 01/26/18 – 03/05/21).**
  6. Risk Factors: Dividend and pin risk at expiration.****
  • The Billionaire Risk Reversal Strategy:
  1. Suggested Capital Requirements: $5,000 per position – maximum of five positions ($50,000).
  2. Holding Period: Twelve weeks.
  3. Personal Time Requirements: One to three hours per week.
  4. Published Annualized Return: 25.3% based on $50,000 capital (04/12/19 – 03/05/21).*
  5. Published Win Percentage: 55.3% (04/12/19 – 03/05/21).**
  6. Risk Factors:  Dividend and pin risk at expiration.***

*Published Annualized Return is based on published results since inception and is not a guarantee of future results.

**Published Win Percentage is based on actual results since inception and is not a guarantee of future results.

*** Dividend risk is the risk that you’ll get assigned on your short option position the night before the stock’s ex-dividend date. When this happens, you’ll open on the ex-date with a short position and be responsible for paying that dividend. You can avoid this by closing your position before the end of the regular-hours trading session the night before the ex-date.

****Pin Risk occurs when at expiration, a short option position is trading very close to the strike price making it hard to tell       if assignment will occur and may require action by the trader.

‘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: 03/12/21 3943.34 S&P 500: 03/12/21 3943.34
S&P 500 Points Gain/Loss: 1457.60 S&P 500 Points Gain/Loss: 1352.24
S&P 500 % Gain/Loss: 58.6% S&P 500 % Gain/Loss: 52.2%
Risk Capital: $14,000 Risk Capital: $100,000
Optionomics Traders $ P/L: $11,665 Optionomics Covered Call $ P/L: $32,047
Optionomics Traders % P/L: 83.3% Optionomics Covered Call % P/L: 32.0%
Last Week’s Traders % P/L: 5.7% Last Week’s Covered Calls % P/L: 0.1%
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: 03/12/21 3943.24 S&P 500: 03/12/21 3943.29
S&P 500 Points Gain/Loss: 1070.37 S&P 500 Points Gain/Loss: 1035.88
S&P 500 % Gain/Loss: 37.3% S&P 500 % Gain/Loss: 35.6%
Risk Capital: $100,000 Risk Capital: $50,000
Optionomics Put-Call Hedge $  P/L: $39,028 Optionomics Billionaire Trade $ P/L: $244,572
Optionomics Put-Call Hedge % P/L: 39.0% Optionomics Billionaire Trade % P/L: 489.1%
       
Last Week’s Put-Call Hedge % P/L: 0.1% Last Week’s Billionaire Trade % P/L: 4.4%

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Mr. Seifert