Rising Rates And Geopolitical Tensions Erase Market Bounce
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).
Another volatile week saw equities take a stutter step on Monday, a sharp two-day rally and a 500-point Dow dive on Thursday, before falling into the weekend on ramped up geopolitical tensions between Russia and Ukraine. Strong Q4 earnings from a wide array of companies including Tyson Foods (TSN), Harley-Davidson (HOG), Amgen (AMGN), Walt Disney (DIS) and Chipotle Mexican Grill (CMG) helped investors absorb the prospects of higher rates during the week, but a hotter than expected CPI on Thursday, showing the biggest inflation jump since 1982, and hawkish comments from St. Louis Fed President James Bullard calling for a 1% hike in rates by July, rattled market participants, sparking a two-day selloff. The yield on the 10-year T-Bill jumped to 2.06% and the 30-year to 2.35%, while the CME FedWatch surged to a 96.7% projection for a .50% rate hike in March. Friday’s reports sent rates lower and the 10-year T-Bill yield settled at 1.918% and the odds of a .50% rate hike slipped to 50/50. Crude oil prices spiked on Friday closing at $93.68 a barrel, while gold was also on the move finishing at $1862.90 an ounce. The market sectors were mostly lower with rate sensitive and growth sectors Technology (XLK), REITs (XLRE), Communication Services (XLC), Consumer Discretionary (XLY) and Utilities (XLU) all down more than -2%, while Energy (XLE), Materials (XLB) and Financials (XLF) ended the week higher. The end of the week selloff snapped a two-week win streak for the major averages and held the different indexes below key resistance levels.
For the period, the DJIA lost 351.68 points (-1.0%) and settled at 34738.06. The S&P 500 tumbled 81.89 points (-1.8%) and closed at 4418.64. The NASDAQ dropped 306.86 point (-2.2%) finishing at 13791.15. The small cap Russell 2000 bucked the trend adding 27.79 points (+1.4%), finishing at 2030.15.
Market Outlook: The technical condition of the market deteriorated with the late week selloff. After bouncing on better-than-expected earnings, the different indexes gave up the gains and dropped back below key moving average (MA) support levels on Friday as global tensions ratcheted up. The technical indicators slipped into neutral to negative ground and all the indices are trading below their respective 200-day MA. One positive is the outperformance of the Russell 2000 which was able to close higher for a second-straight week but also remains below its 200-day MA. Internal breadth was negative, but the late week selloff didn’t show signs of panic selling. Although volume was above average, neither the NASDAQ nor the NYSE showed declining volume of more than 85%. The NYSE and NASDAQ Advance/Decline lines lost some ground but were not indicative of investors throwing in the towel, but showing signs of hedging or moving to safer assets. New 52-week lows expanded during the week, showing negative divergence, and the NASDAQ has totaled more new lows than highs for the last 13-weeks. Investor Sentiment remains bearish and Friday’s Consumer Sentiment Index came in at 61.7, the lowest number since 2012.
It looked like investors had come to terms with a series of rising rates to battle inflation this week, as the major averages rallied up to resistance areas before the rally stalled. Bullard’s comments however, made it look like the Federal Reserve was afraid it was behind the curve and would need to hike rates faster than anticipated. While the possibility of a .50% hike in March is possible, Fed Chair Jerome Powell has been very transparent in his desire to only raise rates a .25% and that is the most likely outcome. Next week we are likely to get more committee members coming off the sidelines to give the Federal Reserve a more united front on changes to monetary policy. That would steady the market, but as mentioned last week, we could be in a holding pattern until after the March FOMC Meeting. In addition to that, the wild card over the near-term is how the Russia/Ukraine conflict is resolved. It looks to me like we’ve got another volatile week ahead.
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 +4, unchanged from the previous week. Cycles A, B, D and E are bullish, while Cycle C is bearish. If the CTI is projected to remain positive for at least one or two more weeks.
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 Negative at -4, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 669 units while the number of new 52-week lows exceeded the number of new highs on all five sessions. Breadth was also negative at the NASDAQ as the A/D line slid 7 units while the number of new lows out did the new highs on each day. Finally, the percentage of stocks above their 50-day moving average jumped to 39.5% vs. 30.7% the previous week, while those above their 200-day moving average rose to 39.1% vs. 35.4%. 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. The Sentiment Index is Positive at +3, down a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 2/09/22 shows inflows of $15.9 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 1/14/2022 (DJIA – 35911.81).
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.
FREE Two-Week Trial Subscription
The option ‘Strategies’ offered by the Optionomics Group are unique in that they all have limited risk while creating great leverage. Our Basic Strategy, “Bullish – Bearish Credit Spread Trades” lets you control 100 shares of a $200 stock, a $20,000 position for less than $500 which is 40:1 leverage. Your maximum risk is always limited, and our strategies produce winning trades in three out of four possible outcomes.
Optionomics lets you be the casino whereby you have a mathematical edge that enables you to grind out good, consistent returns. over a short to intermediate-term time frame 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 Mr. Seifert’s latest book, “Trading Options My Way”. I doubt that you have ever read anything like this.
The ‘Traders’ Subscription Includes The Following:
- The Basic Strategy: Bullish And Bearish Credit Spread Trades: 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 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 the ‘Traders’ plan for $29.95 per month or the ‘Investors’ plan for $49.95 per month on a month to month basis with no contract or strings attached. If you subscribe to both (great idea), it is only $59.95 per month which is a 25% discount off the regular subscription rate. 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