Bumpy Week on Wall Street
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).
| The major averages were rattled by inflation contagion this week that led to a three-day slump in prices before rebounding and ending on a high note as the week ended. The week opened with technology shares being hammered on Monday sending the NASDAQ down 350.38 points (-2.55%) and the Philadelphia Semiconductor Index down -4.66%, wrecking an early rally in the Dow that saw the blue chip index briefly cross 35,000. Stocks tumbled again on Tuesday as investors fretted that the economy was running too hot and that the Federal Reserve was in danger of waiting too long to raise interest rates. A jump in the April CPI to +4.2% YoY sank the different indexes again on Wednesday and the DJIA dropped 681.50 points (-1.99%) to 33587.66 with every sector except Energy (XLE) finishing in the red. Stocks were able to bounce back on Thursday and Friday however on better than expected economic data and a strong jobs report that saw Initial Jobless claims fall to a pandemic low. Also helping to cool investor jitters and walk back yields were comments from Fed Governor Chris Waller that the Fed does not expect sustained inflation or higher rates of inflation and the White House adding that recent inflation data was transitory. Finally, a report on Thursday by the CDC that vaccinated people no longer needed to wear masks or physically distance indoors or outdoors in almost all circumstances helped extended the gains into the weekend. Cruise lines, airlines, casinos, restaurants and other reopening stocks led the advance. The sectors were mostly lower led down by losses in Consumer Discretionary (XLY), Technology (XLK) and Communication Services (XLC), while Consumer Staples (XLP), Financials (XLF) and Materials (XLB) outperformed and finished positive. The two-day rally to close out the week wasn’t enough to erase the losses from earlier in the period but it came close. However, the major averages all finished lower with the NASDAQ extending its weekly losing streak to four.
For the period, the DJIA lost 395.63 points (-1.1%) and closed at 34382.13. The S&P 500 gave up 58.75 points (-1.4%) and settled at 4173.85. The NASDAQ tumbled 322.26 points (-2.3%) to close at 13429.98, while the small cap Russell 2000 fell 47.00 points (-2.1%) finishing at 2224.63. <B>Market Outlook:</B>The technical condition of the market remains mixed despite the deterioration in the technical indicators early in the week. Momentum, as measured by the 14-day RSI, in the DJIA and S&P 500 slowed but finished in positive ground, while slipping into neutral ground for the NASDAQ and Russell 2000. The S&P 500 was able to bounce off support at its 50-day moving average (MA)during the week, but the NASDAQ and Russell 2000 closed below that key moving average support level and the NASDAQ’s end of week surge stalled at its 100-day MA. The NASDAQ did however finish the period oversold with stochastic below 20 for the first time since early March and could extend its recovery next week. As mentioned last week the negative divergence in the NASDAQ, Russell 2000 and Philadelphia Semiconductor Index are signs that the bull rally could continue to struggle as we head into the summer months. The pickup in volatility, with the VIX spiking to 29 this week, shows traders are unsure whether the inflation data is ‘transitory’ or, shows the Fed is behind the eight-ball on rates. The DJ Transportation Index however, showed positive divergence as it briefly traded back to a record high on Friday on strength in airlines. Internal breadth deteriorated during the week with the NYSE and NASDAQ Advance/Decline lines losing ground, while the number of new 52-week lows outpaced the new highs on several days. On the plus side, investor sentiment is returning to a more neutral condition. This week the American Association of Individual Investors (AAII) survey registered its lowest percentage of bulls since the last week of October, while the National Association of Active Investment Advisors (NAAIM) Exposure Index, which was at 103.7 two weeks ago, fell to 46.9 this week showing money managers are less than 50% invested in equities currently, and their lowest exposure since May 2020. This week the hotter than expected CPI caused a spike in volatility but a dip in Retail Sales and the Consumer Sentiment Index on Friday seemed to settle inflation concerns and walk back interest rates. We could see the major averages extend their rebound next week as investors cheer the CDC’s announcement, as that will hasten the reopening of the economy. However, a faster reopening could lead to a ‘good news is bad news’ scenario if it causes the economy to overheat. Keep an eye on rising yields and whether the NASDAQ can trade back above its 50-day moving average in the coming week for a sign that market weakness could continue. With the Market Edge market timing model a week or two from shifting to a bearish market posture, investors may want to remain cautious on stock exposure at this time. 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. <B>Cyclical Trend Index (CTI):</B> 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 +1, unchanged from the previous week. Cycles A, B and E are bullish, while Cycles C and D are bearish. The CTI is projected to shift to a bearish posture over the next week or two. <B>Momentum Index (MI):</B> 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, unchanged from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 1878 units while the number of new 52-week highs out did the new lows on three of five sessions. Breadth was negative at the NASDAQ as the A/D line lost 2899 units while the number of new lows beat the new highs on three of five days. Finally, the percentage of stocks above their 50-day moving average slipped to 54.3% vs. 64.4% the previous week, while those above their 200-day moving average fell to 80.5% vs. 84.0%. Readings above 70.0% denote an overbought condition, while below 20% is bullish. <B>Sentiment Index (SI):</B> 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 5/12/21 shows inflows of $9.0 billion. Currently, the Sentiment Index is Negative at -1, up two notches from the previous week. <B>Market Posture:</B> 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.
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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. In addition, you can get a good idea of how your trades are performing during the week by simply checking the price of the underlying stock. There is no need to check the individual option spreads.
One thing should 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.
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