Major Averages Mixed As Rally Struggles Near Highs
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).
Stocks struggled for direction this week as investors weighed better-than-expected earnings with growing inflation concerns and threats of new shutdowns in Europe due to spreading Covid cases. Although the S&P 500 and NASDAQ punched new record highs, the DJIA, DJ Transports and small cap Russell 2000 finished down for a second straight week. Economic data and Q3 earnings showed consumers were flush with cash and ready to spend as October Retail Sales jumped +1.7% and retailers Home Depot (HD), Lowes (LOW), TJX Companies (TJX) and Macy’s (M) blew away estimates and raised guidance for the holidays. The Consumer Discretionary (XLY) sector led the indexes higher gaining +3.74%. The Technology Sector ETF (XLK) also outperformed and hit a new record high on strength in semiconductors and big cap tech names. Shares of NVIDIA (NVDA), Broadcom (AVGO), Marvell Technologies (MRVL), Microsoft (MSFT), Apple (AAPL) and Alphabet (GOOGL) all recorded new highs. The Philadelphia Semiconductor Index (SOX) continues to show positive divergence and has surged +24% off its October low as chip shortages mount. Despite strong economic data, yields inched lower on growth concerns due to Europe’s shutdowns. The yield on the 30-year Treasury slipped to 1.90%, while the 10-year rate fell to 1.54%. Crude oil prices were also lower after President Biden asked the FTC to “further examine what is happening with oil and gas markets” and crude ended the week at $76.11 a barrel, down -10% since its October high. Energy (XLE), Financials (XLB) and Materials (XLB) were the worst performing sectors on the dip in oil prices and a narrowing yield curve, while Communication Services (XLC), Industrials (XLI) and Consumer Staples (XLP) were all down more than -1%. The week’s back and forth trading left the major averages mixed as we head into the shortened Thanksgiving Holiday week, but negative divergence in breadth hints that more weakness lies ahead.
For the period, the DJIA was lower for a second straight week losing 498.33 points (-1.4%) and settled at 35601.98. The S&P 500 added 15.11 points (+0.3%) and closed at 4697.96. The NASDAQ jumped 196.48 points (+1.2%) finishing at 16057.44, while the small cap Russell 2000 fell 68.61 points (-2.8%), finishing at 2343.16.
Market Outlook: The technical condition of the market deteriorated this week despite new highs in several of the indexes. The technical indicators slipped into neutral to negative territory with MACD, which measures the short-term trend, bearish for the DJIA, Transports and Russell 2000. Mixed trading left Momentum, as measured by the 14-day RSI, neutral, but positive for the S&P 500 and NASDAQ. The S&P 500 and NASDAQ also finished the period overbought according to stochastics in the 90’s but look to be consolidating recent gains. The Russell 2000 was the weakest performing index and a retest of 2340-2345 is support. That was the previous resistance for the index and a break below that level could induce more selling. Market leadership also appears to be narrowing. Last week it was noted that only the Communication Services (XLC) sector was trading below its 50-day moving average (MA) but this week Energy (XLE) and Financials (XLF) also deteriorated and finished the period below this key moving average support level. Several of the different indexes were able to punch new record highs this week, but it should be pointed out that it was on negative breadth. Underlying internal breadth didn’t support the new highs showing the gains were generated by overweighted big cap technology stocks. The NYSE and NASDAQ Advance/Decline lines were lower for a second straight week showing most stocks were under distribution. In addition, new 52-week highs contracted, and the NASDAQ recorded more new lows than highs on three days. Thursday’s 409 new lows on the NASDAQ was the biggest number since March 2020. This negative divergence is generally a precursor to lower prices, but as we’ve seen over the last year strength in big cap names can limit downside for the broader market. Finally, investor sentiment remains overly bullish with bears nowhere to be found. This week the Percentage of Bearish Investment Advisors fell to 21.4%. That is the lowest number since the first week of September just before the DJIA tumbled -4.2% over a two-week period. When these readings swing too far to one side they become contrarian indicators.
According to the Stock Trader’s Almanac, Thanksgiving week can be a slow starter but picks up steam as investors prepare for a strong December. This year should be no different as headwinds going into next week include covid, shutdowns and inflation concerns, as well as President Biden possibly choosing to replace Jerome Powell with Lael Brainard as chairman of the Federal Reserve. While Brainard is also considered dovish on rates, a change in quarterbacks at this stage of the recovery could temporarily rattle the stock market. However that plays out, look for dips to be bought as strong earnings and mostly better-than-expected economic data should boost equities into year-end after the major averages take another week or two to consolidate recent gains. A downside target for the DJIA would be 35200-35300.
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 +1, unchanged from the previous week. Cycles C, D and E are bullish, while Cycles A and B are bearish. The CTI is projected to remain in a positive configuration into year-end.
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 +4, down two notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 3750 units while the number of new 52-week highs exceeded the number of new lows on four sessions. Breadth was negative at the NASDAQ as the A/D line declined 5332 units while the number of new lows out did the new highs on three days. Finally, the percentage of stocks above their 50-day moving average fell to 60.5% vs. 69.2% the previous week, while those above their 200-day moving average slipped to 60.4% vs. 65.5%. 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 marketís future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. The Sentiment Index is Negative at -2, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 11/17/21 shows outflows of $465 million.
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).
Ask Mr. Seifert
Why is market psychology so important to success as a trader or investor?
Without a doubt the most important aspect of trading or investing isn’t numbers. Everyone has numbers. It is your emotional view of the market that is the key. For over 40 years I have taught scores of people how to trade and the one common trait that all successful traders and investors have is that they understand how the market works. It has never ceased to amaze me how little traders comprehend when I ask them how a trade takes place. How can you expect to beat the New England Patriots if you don’t know what defense they are in? It is incredible that most traders believe that when the market is rallying it is because there are more “buyers than sellers”. They listen to the media and that is what they tell them is going on during a rally. When the market is breaking, they are told there are more “sellers than buyers”. So here is my first lesson on market psychology. The market is an auction where buyers and sellers bid and offer for a security or option. For every buyer there must be a seller. When they agree to exchange wealth, it is called “price discovery”. The market is in equilibrium, even if it is only for a few seconds. So how does the market rally if the number of buyers and sellers are the same? The buyers are willing to pay more to get in. When they can’t find any sellers at the price they want, they must “bid the market higher”, until they find where the sellers will exchange wealth.
The second principal that a trader must learn after they understand that the market is an auction is that there is no silver bullet that prints money. Trading is a probability game and as such, wild things are going to happen. Let’s say that you follow Market Edge which has had a phenomenally accurate prediction record for the past 25 years. Even if it picks 70% winners, you are still going to have losing periods where nothing goes right. If you quit trading every time that it hits a slump, you will be around for the losers but will miss out on the winners. When you trade or invest you must be willing to accept the inevitable drawdowns that are part of the business. Even Warren Buffett takes beatings from time to time and if he quit every time things went sour, you wouldn’t know his name!
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
|