Bulls Stumble Into September
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).
| Investors came back from the Labor Day weekend in a dour mood as the DJIA and S&P 500 ended the week on a five-day losing streak, their longest since February. Rising Delta variant cases threatened to push out the reopening of the economy causing Goldman Sachs and Bank of America to lower GDP projections, while inflation data continued to come in hotter than expected with August PPI rising +0.7%. That triggered concerns that the Federal Reserve could soon begin tapering asset purchases and interest rates nudged higher. The yield on the 10-year Treasury closed the week at 1.335%, just below the 1.37% resistance level, while the 30-year rate rose to 1.93%. Weakness in the major averages was felt pretty much across the board with REITs (XLRE), Healthcare (XLV), Industrials (XLI), Energy (XLE) and Technology (XLK)the worst performing market sectors and only Consumer Discretionary (XLY) down less than 1% on strength in Gambling and Casinos stocks as the NFL and College Football kicked off their season. Crude oil prices again flirted with $70 a barrel but finished the period at $69.59. The September slump snapped a two-week win streak for the S&P 500 and NASDAQ, while the Dow Jones traded down for a second straight week as the major averages tumbled into the weekend on cautious trading.
For the period, the DJIA dropped 761.37 points (-2.2%), its biggest weekly loss since June, and closed at 34607.72. The S&P 500 lost 76.85 points (-1.7%) and settled at 4458.58. The NASDAQ fell 248.03 points (-1.6%) to close at 15115.49, while the small cap Russell 2000 tumbled 64.50 points (-2.8%) finishing at 2227.55. Market Outlook: The technical condition of the market deteriorated this week as the major averages traded lower on weak underlying breadth. The NASDAQ and the S&P 500 outperformed and both briefly traded at new highs this week, along with the Philadelphia Semiconductor Index (SOX), but were unable to hold onto early gains throughout the week. The technical indicators for those indexes slipped into neutral ground and Momentum, as measured by the 14-day RSI, is slowing. MACD crossed into a bearish setup over the short-term on Friday. Negative divergence is showing in the price action of the DJIA, which is more cyclical oriented, as it broke below its 50-day MA before finding support at its 100-day MA. The Dow also traded below its August low and next support looks to come in at 33750, the May and August lows. That woulld represent a -5.2% selloff and would be the first 5% correction for the dow since October 2020. The small cap Russell 2000 and DJ Transportation Index, also showed negative divergence and were the worst performing indexes. The Russell 2000 was able to find support at its 50-day MA after falling below its 100-day MA on Friday, while the DJ Transportation Index finished the week trading below both support levels. On the plus side, both indexes remained above August lows but the technical indicators slipped into neutral to negative ground. Another positive going forward is that only the Industrial (XLI) and Energy (XLE) sector ETFs have fallen below their respective 50 and 100-day MA confirming that the almost all sectors remain in an intermediate uptrend, but the Healthcare (XLV) and Materials (XLB) ETFs closed the period not far from their 50-day MA. Internal breadth also deteriorated this week, but not on a scale that looks like anything more than an overdue -5-7% selloff. In fact, money flow into equities and ETFs has been positive six of the last seven weeks. That is more in line with rotational movement in the market as investors realign exposure to the market. Investor Sentiment has returned to a more neutral position. Most investors are still bullish but have backed off extreme levels seen in July and early August. The market rally paused this week and the bull looks like the summer heat wave may be taking its toll, but bearish investors may not want to jump ship yet. Cycle Analysis shows that the average bull market last about 2.7 years or, 31-months before we see a significant slowdown in a market rally. So far, the current bull run is only going on 19 months. Additionally, the faster the stock market recovers from a bear market, the stronger a bull market will be. The bear market of 2020 lasted only 33-days from peak to trough and according to Sam Stovall, CFRA’s Chief Investment Strategist, it was the fastest recovery on record. The major averages recovered everything they had lost in five months, making it the third fastest in market history to recoup its losses. The Market Edge Cyclical Trend Index (CTI) is currently in a bullish configuration and not expecting any of the major cycles to bottom until October. That indicates that while we can see prices vacillate and perhaps see a 5% correction, a bullish Market Posture should remain intact. As mentioned over the past weeks, we have seen an underlying rotation and correction in several of the secondary indexes while the major averages have been able to notch new record highs. The DJIA, S&P 500 and NASDAQ have been able to hold off extended selling pressure but a 5-7% correction at this time could help the bulls regroup and enable the major averages to pick up the rally to close out the year. Look for some rocky trading with added volatility as investors navigate what looks like a slippery September. 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 +12, unchanged from the previous week. Cycles B, C, D and E are bullish, while Cycle A is bearish. The CTI is projected to remain in a positive configuration into the fall. Momentum Index (MI): The marketís 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, unchangedfrom the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 2946 units while the number of new 52-week highs out did the new lows on all four sessions. Breadth was also mixed at the NASDAQ as the A/D line fell 3840 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 dropped to 50.9% vs. 63.9% the previous week, while those above their 200-day moving average fell to 62.0% vs. 69.6%. Readings above 70.0% denote an overbought condition, while below 20% is bullish. Sentiment Index (SI): Measuring the marketís Bullish or Bearish sentiment is important when attempting to determine the marketís 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 9/08/21 shows inflows of $1.1 billion. Currently, the Sentiment Index is Neutral at +1, up a notch 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 7/30/2021 (DJIA – 34935.47). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below. Industry Group Rankings : What’s Hot (61) What’s Not (30). Of the 91 Industry Groups that we track, 61 are rated as either Strong or Improving while 30 are regarded as Weak or Deteriorating. The previous week’s totals were 61-30. The following are the strongest and weakest groups for the period ending 9/09/21. Strongest: Marine Transportation, Water Utilities, Paper Products and Forest Products. Weakest: Airfreight/Couriers, Oilfield-Equipment, Beverages and Oilfield-Drilling. To review all of the Industry Group rankings click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 9/09/21 were: Shorts (+2.34%), Commodity-Base Metals (+2.08%), Bond-Government Long Term (+0.75%) and Bond-Inflation Protected. The weakest categories were: Blend-Small Cap (-2.97%), Commodity-Agriculture (-2.42%), Sector-Real Estate (-2.34%), Sector-Basic Materials (-2.26%) and Commodity-Precious Metals (-2.01%). To review all of the ETF categories in the Market Edge universe, click on the ETF tab. By David L. Blake, CMT
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ask Mr. Seifert
What is Implied Volatility?
Implied Volatility (IV) is the rate at which the price of a security increases or decreases for a given set of returns. It is derived by calculating the standard deviations from the current mean. To the average investor that definition doesn’t mean that much but if you watch your portfolio you should notice that when we are in a high volatility environment and when volatility is low. As a rule, volatility will go up when the market is breaking down and will be down when it is rallying.
Since most option trading volume usually occurs in at-the-money (ATM) options, these are the contracts generally used to calculate IV. Once we know the price of the ATM options, we can use an options pricing model and a little algebra to solve for the IV. For those of you who snoozed through Statistics 101, a stock should end up within one standard deviation of its original price 68% of the time during the upcoming 12 months. It will end up within two standard deviations 95% of the time and within three standard deviations 99% of the time.
To option traders, implied volatility is more important than historical volatility because IV factors in all market expectations. If, for example, the company plans to announce earnings or expects a major court ruling, these events will affect the implied volatility of options that expire that same month. Implied volatility helps you gauge how much of an impact news may have on the underlying stock. With an option’s IV, you can calculate a published range – the high and low of the stock by expiration. Implied volatility tells you whether the market agrees with your outlook, which helps you measure a trade’s risk and potential reward.
Let’s assume a stock trades at $50 with an IV of 20% for the at-the-money (ATM) options. If we assume a normal distribution of prices, we can calculate a one standard-deviation move for the stock by multiplying the stock’s price by the IV of the at-the-money options. For example, if the stock is trading at $50 with an IV of 20%, there’s a consensus in the market place that there is a probability of a one standard deviation move over the next 12 months which would be plus or minus $10 since 20% of the $50 stock price equals $10. Simply put, the market thinks there’s a 68% probability that at the end of one year, XYZ will wind up somewhere between $40 and $60. By extension, that also means there’s only a 32% chance the stock will be outside this range. In addition, 16% of the time it should be above $60, and 16% of the time it should be below $40.
All implied volatilities are quoted on an annualized basis, which means the market thinks the stock would most likely neither be below $40 or above $60 at the end of one year. Statistics also tell us the stock would remain between $30 and $70 (two standard deviations) 95% of the time and would trade between $20 and $80 (three standard deviations) 99% of the time. Another way to state this is there is a 5% chance that the stock price would be outside of the ranges for the second standard deviation and only a 1% chance of the same for the third standard deviation. Knowing the potential move of a stock which is implied by the option’s price is an important piece of information for all option traders.
Since we don’t trade one-year options contracts, we must break down the first standard deviation range so that it can fit our desired time period (e.g. the number of days left until expiration). As a short cut, divide the quoted IV by 19, which is a whole number when solving for the square root of 356 to get the weekly IV. It can’t be emphasized enough, however, that implied volatility is what the marketplace expects the stock to do in theory. And as you probably know, the real world doesn’t always operate in accordance with the theoretical world. In the stock market crash of 1987, the market made a 20 standard deviation move. In theory, the odds of such a move are positively astronomical: about 1 in a gazillion. But in reality, it did happen. Not many traders saw it coming.
FREE Two-Week Trial Subscription
| The option ‘Trades’ and ‘Strategies’ offered by the Optionomics Group are unique in that they all have limited risk while creating great leverage. Our basic Bullish – Bearish Credit Spread Trade lets you control 100 shares of a $200 stock, a $20,000 position for less than $500 or 40:1 leverage. Your maximum risk is always limited, and our strategies produce winning trades in three out of four possible outcomes.
Optionomics let you become the casino whereby you have a mathematical edge that enables you to grind out consistent returns. These strategies are designed to produce good returns over short to intermediate-term time frames in any type of market environment. Optionomics offers a FREE Two-Week trial to its entire web site with no cost or strings attached. Each of the strategies are explained in a 5-7 page booklet and a video which includes detailed explanations and sample recommendations. During the trial, you can paper trade the various strategies and get a feel for the deal without risking a penny. Simply click on the appropriate tab on the Optionomics’ Home page to access the informative booklets and then sign up for the trail. As a special offer, you can download a FREE copy of my latest book, “Trading Options My Way”. I doubt that you have ever read anything like this. The ‘Traders’ Subscription Includes The Following: · The Bullish – Bearish Credit Spread Trade: A basic strategy to trading weekly credit spreads. · The One Day Wonder Trade: A one day trade with great consistency and upside potential. · The Blow Off Top – Bottom Trade: A lot of action and big moves too. The ‘Investors’ Subscription Includes The Following: · The 21st Century Covered Call Strategy: A modern day alternative to the old-fashioned covered call strategy. · The Low Cost Put-Call Hedge Strategy: Sleep at night knowing your portfolio is protected for little or no cost. · The Billionaire Risk Reversal Strategy: Big time leverage – small time risk. Each Monday morning by 11:00 EST, the recommendations for each strategy are posted on the Optionomics’ web site. In addition, the updated results from the previous week are posted on the Optionomics’ Scoreboard. You can subscribe to either the Traders or the Investors plans at an introductory special of only $39.95 each per month on a month to month basis with no contract or strings attached. That’s $10.00 off the regular monthly subscription rate ($49.95). If you subscribe to both it is only $64.95 per month. I think you will agree that this is a super offer so give it a try. Go to www.optionomicsgroup.com and get started today doing what the pros do – “Don’t Buy Them – Sell Them” Mr. Seifert
|