Major Averages Mixed
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
| Like the previous week, the major averages stumbled out of the gate in volatile trading before reversing and finishing the period mixed going into the weekend. Inflation concerns kept pressure on prices as investors pondered Fed comments that they had discussed tapering bond purchases if the economic expansion overheated. Strong earnings from Home Depot (HD), Walmart (WMT), Macy’s (M), Deere & Co (DE) and others were met with mixed results, while big cap technology shares struggled before bouncing off support to lead the week ending rally. Strength in semiconductors, led by gains in shares of NVIDIA (NVDA), Advanced Micro Devices (AMD) and Lam Research (LRCX) fed the rally in tech stocks. The Philadelphia Semiconductor Index (SOX) closed up +2.4% on the week. The different indexes snapped a three-day slump on Thursday after Initial Jobless Claims hit a new pandemic low, while a drop in the May Philadelphia Fed Mfg. Index to 31.5 vs. April’s 50.2 eased inflation fears. Yields on the 10 and 30-year T-Bills pulled back and every sector except Energy (XLE) posted positive. Stocks were firm again on Friday but last hour selling erased early gains before finishing the day little changed. The sectors finished mixed with REITs (XLRE), Healthcare (XLV), and Utilities (XLU) outperforming, while Energy (XLE), Industrials (XLI), Materials (XLB) and Consumer Discretionary (XLY) lagged the broader market. Giving a boost to Healthcare was strength in biotech, as the NASDAQ Biotechnology ETF (IBB) jumped +1.1%. Commodities weakened on comments that the infrastructure and reopening trade was extended, while a drop in oil prices, on concerns that Iranian oil could hit the market if sanctions are eased, also weighed on the commodity index. The major averages struggled to hold regained support levels ahead of the weekend and ended the week mixed, with the DJIA and S&P 500 down for a second straight week, while the NASDAQ brought an end to its 4-week losing streak.
For the period, the DJIA slipped 174.29 points (-0.5%) and closed at 34207.84. The S&P 500 gave up 17.99 points (-0.4%) and settled at 4155.86. The NASDAQ outperformed gaining 41.01 points (+0.3%) to close at 13470.99, while the small cap Russell 2000 fell 9.36 points (-0.4%) finishing at 2215.27. The technical condition of the market is mixed as the major averages may have entered a trading range as investors weigh whether inflation data will be transitory or ongoing. The technical indicators are mixed with short-term trend indicator MACD negative for the DJIA, S&P 500 and DJ Transportation Index, but close to crossing into positive ground for the NASDAQ and positive for the small cap Russell 2000. Momentum has slipped to a neutral read for the different indexes but is improving for the NASDAQ, Russell 2000 and Philadelphia Semiconductor Index which bodes well for the broader market. The different indexes tested key major average (MA) support levels during the week and held, which brought buyers in and the late-week bounce sent the NASDAQ and Russell 2000 back above their respective 100-day MA but their progress stalled at the 50-day MA. Internal breadth improved during the week and showed underlying strength with the internals mixed or positive on down days. The NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, were positive, showing most stocks are under accumulation, and new 52-week highs outpaced the new lows. Investor sentiment is back to a more neutral stance as several of the indicators watched are showing a decrease in the number of bulls. The American Association of Individual Investors (AAII) saw the percentage of bulls fall from 56.9 six weeks ago to 37, while the Percentage of Bullish Investment Advisors slipped to a neutral 54.5% after a six-week stay in the excessive bullishness camp. With Q1 earnings winding down and the major averages sitting just below all-time highs, investors will be super focused on inflation data going forward and that is likely to be key as to whether the market can move to new highs. Recent data shows the economy is reopening and demand is strong but will supply issues fill the void until pent up demand wanes. Certainly, that is the view of the Federal Reserve as the Committee believes pricing pressures will be reined in as demand returns to normal. Obviously, Fed officials will need more time before determining if their projections on inflation are in line. That could keep the major averages range bound over the next few weeks. The Russell 2000, which tends to lead the market higher and lower, has been range bound since mid-March and could be a harbinger for the major averages going forward. The Market Edge CTI is projected to shift to a Bearish read as early as next week but that does not necessarily mean that we will see a selloff in the market. A negative CTI, coupled with a neutral Momentum Index, could signal that the major averages will trade range bound for the next few weeks. However, with underlying strength in the market internals, the major averages could have another week of positive momentum before we see a change in the Market Posture. Investors should take a more defensive and cautious position going forward. The markets 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 positive at the NYSE as the Advance/Decline line gained 665 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 1388 units while the number of new highs beat the new lows on four of five days. Finally, the percentage of stocks above their 50-day moving average rose to 58.6% vs. 54.3% the previous week, while those above their 200-day moving average increased to 83.9% vs. 80.5%. Readings above 70.0% denote an overbought condition, while below 20% is bullish. Measuring the markets Bullish or Bearish sentiment is important when attempting to determine the markets future direction. Market Edge tracks nine technical indicators that measure excessive speculative or sentiment conditions prevalent in the market. The Sentiment Index is Negative at -1, up two notches from the previous week. The Dividend Yield Spread (0.22 vs. 0.21) is Bullish. NYSE short interest was up +0.4% and 2.9 days of average volume for the period ending 4/30/21 vs. being up +1.5% and 3.1 days average volume to cover mid-April. Short interest at the NASDAQ was down -0.4% and 2.5 days of average volume at the end of April vs. a +2.5% increase and 2.3 days average volume to cover on 4/15/21. The Percentage of Bullish Investment Advisors (54.5% vs. 58.6%), the Fear and Greed Index (37.8 vs. 46.2), the AAII Bull-Bear Ratio (1.4 vs. 1.4), the NAAIM Exposure Index (44.2 vs. 46.9), and the VIX, a measurement of fear in the market, (20.15 vs. 18.81) are Neutral. The Percentage of Bearish Investment Advisors (17.2% vs. 17.2%), the Total Put/Call Ratio (0.98 vs. 1.01) and the Bullish-Bearish Investment Advisors Ratio (3.2 vs. 3.4) are Bearish. VIX readings under 13.00 are regarded as bearish while those above 30.0 are bullish.
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Question: What is implied volatility?
Answer: Implied volatility is the market’s perception of the future volatility of the underlying stock based on the option’s premium. It is an annualized number expressed as a percentage and since it is forward looking it can change over time. Implied volatility, if plugged into an option pricing model (Black & Scholes) along with several other inputs would give you a theoretical value of an option so as to be compared with the market price of the same option. Since it is an annualized number and options have expirations as short as one week, you can calculate the daily implied volatility by dividing IV by the square root of the number of calendar day per year (365) or by simply dividing the IV by 19. So if the underlying is trading at 24, (24/19) 1.26% would be the expected daily range on 68% (one standard deviation) of all trading days.
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