Bulls Battle Drums of War
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 battled rising rates and ongoing tensions in the Russia/Ukraine standoff this week and global markets were whipped sharply higher and lower before ending the period with losses. The major averages were in the grip of a three-day selloff on Monday as St. Louis Fed President James Bullard reiterated that interest rates need to move higher and at a faster clip to rein in inflation. What appeared to be a diplomatic breakthrough in the Russia/Ukraine conflict on Tuesday triggered a rally in global markets. US markets were led by a 348.84 (+2.53%) jump in the NASDAQ and a +5.47% spike in the Philadelphia Semiconductor Index, while investors shook off a +9.7% YoY surge in the January PPI which pushed the yield on the 10-year Treasury to +2.05%. An early selloff on Wednesday was erased as traders focused on strong economic data with Retail Sales topping expectations, rising +3.9%. Adding to the rebound was the release of the FOMC Meeting minutes that seemed to show the Federal Reserve would only raise rates 0.25-point in March, posing less risk to the economy. Stocks plunged on Thursday, and again on Friday as tensions escalated between Russia and Ukraine. Investors were risk off and gold rose to$1,910.20 an ounce, its highest level since April 2020, before settling at $1,898.70. Speculative assets such as Bitcoin fell to a multi-month low. Defensive sector Consumer Staples (XLP) was the only market group to finish the period positive, while Energy (XLE), Communication Services (XLC) and Financials (XLF) were the worst performing sectors, down more than -2%. The different indexes went into the weekend on a sour note and down for a second straight week as global markets were focused on the conflict in Europe.
For the period, the DJIA tumbled 658.88 points (-1.9%) and settled at 34079.18. The S&P 500 lost 69.77 points (-1.6%) and closed at 4348.87. The NASDAQ dropped 243.08 points (-1.8%) finishing at 13548.07. The small cap Russell 2000 was down 20.82 points (-1.0%), finishing at 2009.33.
Market Outlook: The technical condition of the market deteriorated further with the late week selloff. The major averages settled below their 200-day MA and could be headed for at least the intraday lows from January. The technical indicators are in negative ground with MACD, a trend gauge, crossing into bearish territory for the different indexes. Momentum, as measured by the 14-day RSI, is also bearish and moving lower. A ‘death cross’, wherein the 50-day MA crosses below the 200-day MA, occurred in the NASDAQ this week which usually leads to lower prices. However, note that the last time this happened, in April of 2020, the major averages had reversed a sharp selloff and were already trading back above those key moving averages. On a positive note, secondary indexes the Philadelphia Semiconductor Index, DJ Transportation Index and Russell 2000 outperformed the broader market and hints that we could be getting close to a turnaround. Weakness in the market is widespread with only Consumer Staples (XLP) and Energy (XLE) trading above their respective 50-day MA, while Utilities (XLU) is the only other sector above its 200-day MA. As of Friday, Communication Services (XLC) is in a bear market, down more than -20%. Consumer Discretionary (XLY), Healthcare (XLV), Technology (XLK), REITs (XLRE), Materials (XLB) and Industrials (XLI) however, are all in, or within 1%, of a correction, down 10% or more. Market technicians will be keeping an eye on whether more sector ETFs slide into a bear market. That could be an early inclination that the broader market could fall into a bear market. Internal breadth remains weak with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, showing most stocks are under distribution, while new 52-week lows continue to outnumber new highs, and have for the past 14-weeks on the NASDAQ. Finally, investor sentiment is once again reaching an extreme level of bearishness. The American Association of Individual Investors (AAII) survey saw the bulls drop to 19.2 this week marking the 29th lowest level since the survey started in 1987. The National Association of Active Investment Managers (NAAIM) Exposure Index fell to 53.5%, which is the lowest exposure to equities since May 2021. These readings are regarded as contrarian indicators when they reach extreme levels and can signal that a market bottom could be near.
While the stock market was coming to terms with rising rates, the conflict in Europe is steering market direction now. Despite the market’s negative reaction, historically the effect on the market is marginal and usually short lasting. LPL Financial research notes that stocks have largely shrugged off geopolitical events over the years. “As serious as this escalation is, previous experiences have indicated it may be unlikely to have a material impact on U.S. economic fundamentals or corporate profits,” said LPL Financial Chief Investment Strategist John Lynch. A series of shock events ranging from North Korea Missile Crisis, the 9/11 terrorist attack, Munich Olympics, Pearl Harbor and others shows the average selloff has been about -5% with the stock market bottoming on average 22 days later. Lynch also notes that it has taken about 47 days for the market to recover those losses. Let’s hope that cooler heads prevail over the next week. The NYSE is closed on Monday for President’s Day.
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 B, D and E are bullish, while Cycles A and C are bearish. The CTI is expected to reset to a positive count over the next few weeks as a market bottom is put in.
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 -6, down two notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 1221 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 fell 3140 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 eased to 37.5% vs. 39.5% the previous week, while those above their 200-day moving average fell to 35.8% vs. 39.1%. 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 markets 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 +4, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 2/16/22 shows inflows of $4.8 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: I understand that the Basic Strategy: Bull – Bear Credit Spreads have limited risk and limited profit potential. Do any of the ‘Traders’ Plays have limited risk and unlimited profit potential?
Yes. The remaining ‘Traders’ strategies all have unlimited profit potential with the Blow Off Tops-Bottoms being the best.. These plays are directional plays which are coupled with a put or call spread to either finance the purchase of the deferred option or to reduce the loss in the event that the desired direction doesn’t materialize.
A Blow Off Bottom trade consist of a stock with a Market Edge Bullish Opinion, the purchase of a long, deferred ITM (in the money) call option and the sale of an expiring ATM – ATM -2 put spread. A good example of a Blow Off Bottom occurred on 09/21/20 when Goldman Sachs (GS) was an Optionomics, Blow Off Bottom selection. The stock had a bullish Market Edge Opinion and was trading at $188.37. The play was to sell the 187.5 – 185 expiring (09-25-20) put spread for $0.98 and buy the 187.5 deferred (10-02-20) call for $5.30, a total debit of $4.32. If right, the stock would go up, the put spread would expire worthless while the deferred call would jump in price setting up an unlimited profit situation. If the stock stayed the same or declined in value, the credit from the put spread would go out worthless which would lessen the loss of the deferred call. As it turned out, GS closed on 9/25/20 at $194.95 and the spread settled at $8.68, a gain of $4.36, a double. Had GS closed higher, the gain would have also been more. The opposite setup occurs for Blow Off Top selections.
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