Dow Down for Third Straight Week
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
After five-days of losses for the DJIA and S&P 500, investors did some bargain hunting to start the week, but mixed economic data and ongoing concerns of spreading Covid Delta left the major averages with marginal losses after a Friday selloff. The Dow Jones was able to pick up 261.91-points (+0.76%) on Monday on the backs of oil related shares after crude oil prices rose above $70 on inventory drawdowns and OPEC announcing it anticipated oil demand would outpace prepandemic levels next year. A lower than expected Consumer Price Index (CPI) on Tuesday pushed interest rates down feeding worries that economic growth was slowing and the NASDAQ traded lower for a fifth consecutive session. The major averages were able to bounce again on Wednesday after holding key moving average support levels and a better than expected August Industrial Production report. The back and forth trading continued again on Thursday as strong Retail Sales trumped an uptick in Initial Jobless Claims. The DJIA dropped 274-points at the open but trimmed those losses in the afternoon and the different indexes closed the day mixed and higher for the week. Those gains were lost on Friday however, after the one-year inflation rate came in at +4.7%, its highest level since 2008, and equities sold off as interest rates pushed to a two-week high. The yield on the 10-year Treasury closed at 1.37%. The market sectors also ended the period mixed with Energy (XLE) and Consumer Discretionary (XLY) posting positive, while Materials (XLB), Utilities (XLU), Industrials (XLI) and Communication Services (XLC) were the weakest performers. Finally, Friday’s triple-witching options expiration weakness showed investors were cautious ahead of next week’s FOMC Meeting on monetary policy. When the dust settled on a volatile week, the DJIA had extended its weekly losing streak to three, while the S&P 500 and NASDAQ closed down for a second straight week.
For the period, the DJIA eased 22.84 points (-0.1%) and closed at 34584.88. The S&P 500 lost 25.59 points (-0.6%) and settled at 4432.99. The NASDAQ fell 71.52 points (-0.5%) to close at 15043.97, while the small cap Russell 2000 squeezed out a 9.32 point (+0.4%) gain, finishing at 2236.87.
Market Outlook: The technical condition of the market weakened again as the major averages all finished in the red. The technical indicators have also deteriorated with Momentum, as measured by the 14-day RSI, now negative and MACD, a short-term trend indicator, bearish. Several of the different indexes are testing key major average (MA) support levels but have so far, held. The S&P 500 bounced around its 50-day MA during the period and the DJIA traded on both sides if its 100-day MA before finishing the week just below it. The NASDAQ was able to hold support at its 30-day MA, while the small cap Russell 2000 moved between its 50 and 100-day MA daily. The market sectors are also testing support levels. Coming into September only Energy (XLE) and Industrials (XLI) were trading below their 50-day MA. While the Energy sector has moved back above its 50-day, Consumer Staples (XLP) and Materials (XLB) fell below that support, while Communication Services (XLC), Financials (XLF), Healthcare (XLV), REITs (XLRE) and Technology (XLK) were all flirting with their respective 50-day MA. Obviously, a break below that support level over the next week by the sector ETFs would be a signal that the stock market was in the throes of a more serious selloff, in the 5-7% range.
Internal breadth was negative for a second straight week while the major averages traded in a narrow range. But, as mentioned last week, I’m still not seeing the kind of selling pressure that leads to a deeper correction than we’ve had. The NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, were only slightly lower this week. One concern however, is that the NYSE A/D line last made a new high on July 1. New 52-week highs contracted on both indexes during the week and the NASDAQ turned in more new lows than highs on three days. Investor Sentiment, which had reached extreme bullishness in July, has moderated which is welcomed by market contrarians. This week the American Association of Individual Investors (AAII) released their latest sentiment survey and only 22.4% of participants are bullish on the market. The last time we saw less bulls by retail investors was in July 2020. Hedge funds feel better about the market and the National Association of Active Investment Managers (NAAIM) Exposure Index shows the professional investors are still 87% invested in equities, though down from 93.9% just two weeks ago.
The back-and-forth trading in stocks and bonds point to investors being cautious and noncommittal. Weighing on sentiment is the ongoing coronavirus debacle and how it will affect the economic recovery, as well as next week’s FOMC Meeting. Investors will be looking for indications that the Committee is ready to map out the Fed’s plan to begin tightening monetary policy or, push out a decision until the first week of November. Lastly, market participants have President Biden’s tax reforms to comb over and how higher taxes will tamper economic growth. That is enough to possibly limit gains and keep the major averages trading in a range until we see a catalyst for prices to move higher, but the stock market still benefits from ‘no where else to go’.
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 Neutral at +2, down four notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 291 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was negative at the NASDAQ as the A/D line fell 463 units while the number of new lows beat the new highs on three days. Finally, the percentage of stocks above their 50-day moving average dropped to 47.1% vs. 50.9% the previous week, while those above their 200-day moving average fell to 59.7% vs. 62.0%. 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 9/15/21 shows inflows of $5.9 billion. Currently, the Sentiment Index is Neutral at +2, 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.
By David L. Blake, CMT
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | 12 | 12 | Positive | ||||||
| Momentum Index: | 2 | 6 | Neutral | ||||||
| Sentiment Index: | 2 | 1 | Neutral | ||||||
| Strength Index – DJIA (DIA): | 37.9 | 37.9 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 53.2 | 54.3 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 44.1 | 46.2 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 34584.88 | 34607.72 | -0.1% | ||||||
| S&P 500 Index: | 4432.99 | 4458.58 | -0.6% | ||||||
| NASDAQ Composite Index: | 15043.97 | 15115.49 | -0.5% | ||||||
| *Connotation is Positive or Negative Divergence from the DJIA | |||||||||
| Momentum Index Components | Current Reading | Prior Week | Connotation | ||||||
| *Dow Jones Industrial Averages (DJIA): | 34584.88 | 34607.72 | |||||||
| *DJ Transportation Ave | 14267.96 | 14366.89 | Negative | ||||||
| *S&P 500 Index | 4432.99 | 4458.58 | Positive | ||||||
| *NYSE Composite Index | 16460.35 | 16563.48 | Negative | ||||||
| *NYSE Advance – Decline Line | 523346 | 523637 | Positive | ||||||
| *10 Day MA Advance – Decline Line | 0.79 | 1.02 | Negative | ||||||
| *NDX 100 Index | 15333.47 | 15440.75 | Positive | ||||||
| *NASDAQ Composite Index | 15043.97 | 15115.49 | Positive | ||||||
| *DJ Utilities Index | 903.80 | 929.14 | Negative | ||||||
| *Russell 2000 | 2236.87 | 2227.55 | Positive | ||||||
| Trin – 5 Day Average | 1.17 | 1.10 | Neutral | ||||||
| NYSE Weekly New Highs – New Lows | 289-97 | 460-114 | Positive | ||||||
| Zweig Breadth Indicator | 0.36 | 0.37 | Negative | ||||||
| McClellan Oscillator | 65 | 80 | Neutral | ||||||
| McClellan Summation Index | 1051 | 1268 | Positive | ||||||
| Unchanged Issue Index | 0.04 | 0.05 | Negative | ||||||
| Sentiment Index Components | Current Reading | Prior Week | Connotation | ||||||
| Fear-Greed Index – 5 Day Average | 35.20 | 54.60 | Neutral | ||||||
| Shares Sold Short NYSE – Monthly (000) | 14049026 | 14107144 | |||||||
| NYSE Short Interest Ratio – NYSE Only | 2.6 | 2.7 | Bullish | ||||||
| Shares Sold Short NASDAQ – Monthly (000) | 11023176 | 10999783 | |||||||
| NASDAQ Short Interest Ratio | 2.8 | 2.7 | Bullish | ||||||
| AAII Bull-Bear Ratio | 0.6 | 1.4 | Bullish | ||||||
| Put/Call Ratio – 5 Day Avg All Equity Options | 0.94 | 0.93 | Bearish | ||||||
| Dividend Yield Spread | 0.35 | -0.30 | Bullish | ||||||
| NAAIM Exposure Index | 87.0 | 84.7 | Neutral | ||||||
| Bullish Investment Advisors | 50.0 | 52.6 | Neutral | ||||||
| Bearish Investment Advisors | 22.1 | 21.1 | Neutral | ||||||
| Bullish – Bearish Investment Advisors Ratio | 2.3 | 2.5 | Neutral | ||||||
| VIX – CBOE Volatility Index | 20.81 | 20.95 | Neutral | ||||||
Ask Mr. Seifert
Question: What is exercise and assignment and how does this come into play when trading the Optionomics’ strategies?
Answer: When you short (sell) an option (put or call), there exist the possibility that you could be obligated to buy (short put) or sell (short call) the shares of the underlying stock on any business day. This is known as assignment.
When you are long an option (put or call), you have the right to exercise your option and either buy (long call) the underlying stock away from the owner or sell (long put) the stock to the guy that sold you the put option at the specified strike price.
Options can be exercised any time before the expiration date. One can never tell when an assignment will take place. Options are usually exercised when they get closer to expiration. The reason is that it does not make much sense to exercise an option when there is still time value left. It is usually more profitable to sell the option instead. Over the years, only about 17% of options have been exercised. However, it does not mean that only 17% of your short options will be exercised. Many of those options that were not exercised were probably out-of-the-money to begin with and had expired worthless. In any case, at any point in time, the deeper into-the-money the short options, the more likely they will be exercised.
All of the Optionomics’ strategies involve the sale of some sort of weekly credit spread which results in you being long and short either a put or a call. This ensures that you have limited risk since you never will be selling naked options. Most of the spreads will either expire worthless on the expiration date resulting in no action and a 100% winner. Sometimes they will settle with a small or a full loss which may require some action on your part. This could be simply closing the spread before expiration or you may be assigned your short option and having to exercise the long option in the spread to zero out the position.
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