Global Markets Rally on Vaccine Rollout
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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 picked up where November left off as mostly positive vaccine news and progress on the next relief package sent the different indexes to new record highs this week. Mixed economic data saw the rally stall on Monday, but stocks moved to the upside after that as the UK granted Pfizer’s Covid-19 vaccine emergency use authorization. Other developments saw Moderna (MRNA) announce that it had entered distribution agreements with several countries for its coronavirus vaccine, while Novavax (NVAX) said they were in Phase 3 for its vaccine. Inoculations could be starting next week in Europe and the US. Global markets were also higher on hopes that the vaccine would trigger strong economic growth in the next quarter. Mixed jobs reports on Thursday and Friday gave a boost to equities and stressed the need for more stimulus before benefits ran out. Despite rising rates that sent the yield on the 10-year Treasury just shy of 1%, mortgage rates hit another record low on Thursday propping up housing stocks. A weak US Dollar gave a boost to commodities and foreign markets and the Emerging Markets ETF (EMM) traded higher for a fifth consecutive week. Copper prices also were strong, hitting a seven-year high. Energy (XLE) was the best performing sector as oil stocks advanced on higher crude prices, while Healthcare (XLV), Technology (XLK), Communication Services (XLC) and Financials (XLF) also outperformed. Utilities (XLU) was the weakest sector. The major averages finished the week overbought and stretched by most indicators but hopes for additional stimulus and the rollout of vaccines should keep market participants buying the dips as we roll into the seasonally strong month of December.
For the period, the DJIA gained 307.89 points (+1.0%) and closed at 30218.26. The S&P 500 picked up 60.77 points (+1.7%) and settled at 3699.12. The NASDAQ was higher for a third consecutive week adding 258.38 points (+2.1%) to 12464.23, while the small cap Russell 2000 advanced for a fifth straight week gaining 37.18 points (+2.0%) and finished at 1892.45.
Market Outlook: The technical condition of the market improved this week as the different indexes were able to record all-time highs, extending their November rally. The technical indicators are positive for the different indexes and Momentum, as measured by the 14-day RSI, is strong. The major averages also appear to be breaking out of a consolidation period going back to September. The Dow, S&P 500 and NASDAQ all show Bullish Point & Figure chart Breakouts which is a positive going forward and points to higher prices. The small cap Russell 2000, DJ Transportation Index and the Philadelphia Semiconductor Index continue to lead the rally and carried a five-week win streak into the weekend. The Philadelphia Semiconductor Index soared +6.1% during the week. The market move shows broad participation with almost every sector hitting new highs. Financials (XLF) hit a new recovery high this week on increasing yields and Energy (XLE) has outperformed as crude oil prices rally on economic growth projections. Breadth was positive with the NYSE and NASDAQ Advance/Decline lines moving sharply higher showing increasing underlying accumulation. The NYSE A/D line hit several new highs during the period and is considered a leading indicator of market direction. The number of new 52-week highs is expanding showing broadening leadership as cyclical and small cap stocks take the lead from big cap technology names. Investor sentiment, however, remains overly bullish and it’s hard to find a Bear on the street. Several sentiment indicators are at extreme levels and that is a red flag for traders over the short term and confirms that the market is overdue for some consolidation.
As mentioned previously, the stock market is overbought and may require some backing and filling to work off that condition. The S&P 500 is trading more than +17% above its 200-day moving average, another extreme reading, and the S&P Short Range Oscillator (SRO) closed out Friday at +6.6%. Both of those readings have historically led to some corrective selling over the near term. While the market can remain overbought for extended periods, prices eventually revert to the mean and could be painful if an investor is overly extended on margin. Although stock market returns should be strong in 2021 there is also a chance that we could see more selling than usual going into the end of the year as investors dump losers from the March selloff. In addition, there could be some incentive for traders to take profits if they feel capital gains taxes are going to be on the rise next year under a Biden presidency. While the major averages are in a bull market, the timing may not be right to chase market leaders until we see the market work off some of its overbought condition. On the plus side, LPL Research put out a paper this week reporting that the stock market has finished positive every December since 1984 after a presidential election. If we do get a pause in the rally, I guess there’s always the chance that a Santa rally would cut it short.
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 +14, unchanged from the previous week. Cycles B, C, D and E are bullish, while Cycle A is bearish. The CTI projects a Bullish market cycle into the first of the year.
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 +6, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line jumped 3398 units while the number of new 52-week highs out did the new lows on all four days. Breadth was also positive at the NASDAQ as the A/D line added 2483 units while the number of new highs beat the new lows on each session. Finally, the percentage of stocks above their 50-day moving average eased to 82.8% vs. 83.3% the previous week, while those above their 200-day moving average rose to 87.9% vs. 87.3%. 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 12/02/20 shows inflows of $7.2 billion. Currently, the Sentiment Index is Negative at -5, unchanged from the previous week. This was the fourth week in a row of positive money flow into the market.
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.
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Ask Mr. Seifert
Question: What can happen to a Billionaire Risk Reversal Trade and what action should I take each week?
Bullish Billionaire Risk Reversal Trade: Initial 90-day Combo Position: Long 90-day ATM call, short 90-day ATM put and long 90-day ATM -2 put. Weekly Credit Spread Position: Short weekly ATM (+1) call and long weekly ATM +2 call.
Weekly Activities for a normal week:
Combo Position (Deferred):
- If the Market Edge Opinion on the stock is downgraded then this trade is over. Close entire deferred position (long call as well as short put and long put).
- If the stock closes above the long call, Hold the position (unrealized profit).
- If the stock closes below the long, Hold the position (unrealized loss).
Weekly Credit Spread Position:
- At expiration, if the stock closes at or above the weekly-short call strike. Close the spread (realized loss equal to the spread width minus the credit amount).
- At expiration, if the stock closes at or below the weekly-short call strike. Close or let the spread expire (realized profit equal to the credit amount).
Activities for after a big run up:
Combo Position (Deferred):
- Lock in profits by rolling UP your long deferred call if possible. When you roll UP, you are locking in some of the profits from the stock move. For example, You have a stock that has moved in price from 100 to 140 and the CALL has moved up in price to 45. You can roll the position – sell your 100 CALL and buy a 120 CALL at the same time. The difference there is 20 in intrinsic value so you want to capture as much of that profit as possible. Depending upon the time remaining to expiration the discount you receive will vary. Try not to give up more than 20-30% of potential profit so in this case you would want to get a $14-$16 credit.
- Don’t roll up the position and understand that the large unrealized gain remains at risk.
Weekly Credit Spread Position:
- At expiration, if the stock closes at or above the weekly-short call strike. Close the spread (realized loss equal to the spread width minus the credit amount).
- At expiration, if the stock closes at or below the weekly-short call strike. Close or let the spread expire (realized profit equal to the credit amount).
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