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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages traded in a narrow range this week before finishing the period mixed as investors focused on key inflation data and a jobs report that showed an economy struggling to get people to work. Yields eased to their lowest level since early March after the May CPI came in above expectations, but the results were skewed by supply disruptions and reopenings. That gave credence to the Federal Reserve’s assumption that inflation will be transitory, helping to boost equities. The S&P 500 finished higher for a third consecutive week and pushed to a new record high on Thursday and again on Friday, but the DJIA struggled in its trading range just below old highs. Lower yields led to some rotation out of cyclical and industrial stocks, on valuation concerns, and back into growth stocks and big cap technology shares. Alphabet (GOOGL), Adobe (ADBE), Cisco Systems (CSCO) and NVIDIA (NVDA) all finished the week at new all-time highs. On the flip side, Caterpillar (CAT), Deere & Co (DE) and trucking stocks traded sharply lower, the latter on higher fuel costs. Healthcare (XLV) was one of the best performing sectors on strength in biotech stocks and the iShares NASDAQ Biotech ETF (IBB) soared +6.7% on the week as shares of Biogen (BIIB) spiked +44% after getting FDA approval for its drug treatment for Alzheimer’s. REITs (XLRE), Technology (XLK) and Consumer Discretionary (XLY) also outperformed. Financials (XLF) was the weakest sector as banks traded lower on the narrowing yield curve. Materials (XLB) and Industrials (XLI) also lagged the broader market. The NASDAQ and small cap Russell 2000 outperformed during the week with the NASDAQ’s weekly win streak hitting four, the first four-week win streak since last December-January, and the Russell 2000 up for a third consecutive week. Despite the S&P 500 hitting a new high, the bellwether index only managed a small gain for the period, while the DJIA snapped a two-week win streak after trading lower.
For the period, the DJIA dropped 276.79 points (-0.8%) and closed at 34479.60. The S&P 500 added 17.55 points (+0.4%) and settled at 4247.44. The NASDAQ gained 254.93 points (+1.8%) to close at 14069.42, while the small cap Russell 2000 again outperformed jumping 49.40 points (+2.2%) finishing at 2335.81.
Market Outlook:The technical condition of the market was mixed this week with the DJIA and DJ Transportation Index trading lower, the S&P 500 almost flat, but the NASDAQ and Russell 2000 outperforming on gains near +2%. The technical indicators for the S&P 500, NASDAQ and Russell 2000 are positive and Momentum, as measured by the 14-day RSI, is bullish. MACD, a short-term trend gauge, is also in positive ground and rising. Another plus is that the Russell 2000 was able to break above resistance at 2300 this week which could lead to the small cap index making another run to an all-time high. Leadership by the small caps is a bullish condition for the overall market. The DJIA and DJ Transportation Index however, are showing negative divergence and underperforming the broader market. Momentum is neutral for the Dow Jones and negative for the transports. The DJ Transportation Index went into Friday oversold with fast stochstic in the single-digits and was able to bounce, but stalled just below its 50-day moving average. Negative divergence is also found in the 14-day RSI on the DJIA and S&P 500. This is the first week that the indicators are showing bearish signs that the current rally could be due for a pull back and with the Market Edge CTI negative, investors should be more cautious going forward. Internal breadth is positive with the NYSE Advance/Decline hitting several new highs during the week, while the NASDAQ A/D line is at its highest level since mid-March showing most stocks remain under accumulation. New 52-week highs are expanding, while new 52-week lows are near single-digits on both the NYSE and NASDAQ confirming underlying strength in breadth.
The Sentiment Index remains in negative ground as investors remain too bullish and this week the VIX hit its lowest level since mid-February 2020 before the covid pandemic. The VIX represents expectations for volatility in the market over the next 30-days and measures a level of risk or fear traders see in the market. The VIX closed Friday at 15.65, down from 23.13 in mid-May, and indicates that market participants are likely reining in inflation concerns going forward. With the June FOMC Meeting getting under way next week, investors may be getting too complacent on rates and inflation. Furthermore, the Bullish-Bearish Investment Advisors Ratio shows Bullish Advisors outnumber Bearish Advisors 3.4:1 which is getting to an extreme level.
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 Negative at -6, unchanged from the previous week. Cycle E is bullish, while Cycles A, B, C and D are bearish. The CTI is projected to remain in negative territory into July. At that time we will see a reset of the different cycles that should lead to a resumption of the bull market into the fall.
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 +5, up six notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2438 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 3377 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 rose to 67.2% vs. 65.1% the previous week, while those above their 200-day moving average increased to 86.3% vs. 84.4%. 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 6/09/21 shows inflows of $717 million. Currently, the Sentiment Index is Negative at -2, down a notch from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Neutral as of the week ending 5/28/2021 (DJIA – 34529.43). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
| Market Timing Models | Current Reading | Prior Week | Connotation | |||||||
| Cyclical Trend Index (CTI): | -6 | -6 | Negative | |||||||
| Momentum Index: | 5 | -1 | Positive | |||||||
| Sentiment Index: | -2 | -2 | Negative | |||||||
| Strength Index – DJIA (DIA): | 48.3 | 48.3 | Negative | |||||||
| Strength Index – NASDAQ 100 (QQQ): | 38.5 | 38.5 | Negative | |||||||
| Strength Index – S&P 100 (OEX): | 49.5 | 50.5 | Negative | |||||||
| Dow Jones Industrial Average (DJIA): | 34479.60 | 34756.39 | -0.8% | |||||||
| S&P 500 Index: | , | 4247.44 | 4229.89 | 0.4% | ||||||
| NASDAQ Composite Index: | 14069.42 | 13814.49 | 1.8% | |||||||
Ask Mr. Seifert
Question: My advisor says to buy debit spreads since they have less risk than a credit spread. Is he right?
Answer: Your broker is referring to the fact that a debit spread will always have less premium risk than a credit spread. However, that doesn’t mean that it has less risk. In fact, it has more risk than a credit spread with the same strike. Here is why. For the debit spread to be profitable it must overcome the premium you paid plus it must move in the price direction that you predicted when you bought it. Even if you are correct in predicting the price movement, it may not move enough to overcome the debit. In short, you have to be right and right. On the other hand, a credit spread can win three ways. The price moves in the direction you predicted, the price doesn’t move at all, or the price moves against you but not as much as the credit you sold. For my money, I would rather have three ways to win and take the larger premium risk. In the long run you can’t beat a credit spread.
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