Where’s Santa
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).
It was a bumpy ride this week as the hoped-for Santa rally left the stock market little changed on volatile trading. Santa hit a speed bump on Monday as the major averages plunged on fears that a new strain of the coronavirus discovered over the weekend in the UK would derail a global recovery. The DJIA reversed an opening 400-point loss to finish higher however, as health officials believed the current Covid-19 vaccine would still be effective on a mutant coronavirus. Leading the turnaround was a rally in Financials (XLF) after the Money Center banks passed their ‘stress’ test late Friday and were given authorization to resume stock purchases. Imposed new travel restrictions in Europe and a call for more banking regulation from Senator Bernie Sanders left the market mixed on Tuesday, but there were pockets of strength that helped the NASDAQ and the small cap Russell 2000 print new record highs. A better than expected jobs report on Wednesday saw the different indexes rally at the open, only to finish mixed for a third day as President Trump declined to sign a passed coronavirus relief package, asking for an increase in checks to individuals. Investors waited for a new stimulus bill to be passed on Thursday, but were once again disappointed, leaving the major averages with meager gains. Yields inched higher during the week and the yield on the 10-year T-Bill topped out at .96% before ending the week at .93%. The US Dollar bounced off oversold levels but finished at a level last week in October 2018, while copper, a leading indicator of economic activity, hit its highest level in almost eight years. Financials (XLF), Technology (XLK) and Materials (XLB) were the only sectors that finished higher, while Energy (XLE), REITs (XLRE), Utilities (XLU) and Consumer Discretionary (XLY) sectors were the weakest performers. Although the small cap Russell 2000 index hit several new highs and finished in the plus column for an eighth consecutive week, the broader market struggled with the DJIA and NASDAQ closing higher for a second straight week, while the bellwether S&P 500 finished with a small loss.
For the period, the DJIA added 20.82 points (+0.1%) and closed at 30199.87. The S&P 500 eased 6.35 points (-0.2%) and settled at 3703.06. The NASDAQ gained 49.09 points (+0.4%) to 12804.73, while the small cap Russell 2000 outperformed and picked up 33.96 points (+1.7%) and finished at 2003.95.
Market Outlook: The technical condition of the market was mixed this week as the major averages finished little changed. The NASDAQ and small cap Russell 2000 were able to punch new record highs, but the DJIA and S&P 500 were mostly range bound. The DJ Transportation Index however, showed negative divergence and traded lower for a third consecutive week. The technical indicators for the Dow and the S&P 500 are mixed with Momentum slowing. MACD ST, which gauges the short term trend, is negative for both indexes. The technical indicators for the NASDAQ are positive and Momentum remains strong. Consolidation of recent gains in the broader market worked off some of the overbought condition of the major averages, but the NASDAQ and Russell 2000 still need some back and forth trading to reign in their overbought condition. Underlying breadth is positive but the NYSE and NASDAQ Advance/Decline lines have barely moved over the last two weeks. The number of new 52-week highs remains bullish. Investor sentiment, however, is still too bullish and complacent. The Percentage of Bullish Advisors has been above 60% for five consecutive weeks which is a red flag, and the American Association of Individual Investors (AAII) survey shows bullish retail investors double the number of bearish investors. these are contrarian indicators and again could be indicating that the market is getting toppy. Finally, FINRA shows Debit Balances in Customers’ Securities Margin Accounts reached a record high of $722,118,000 in November. That’s another contrarian indicator that could cause selling to intensify if the stock market rally stumbles in January and bears watching.
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 +11, down a notch from the previous week. Cycles A, B, C, D and E are bullish. The CTI projects a Bullish market cycle into the first of the year.
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 +6, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 519 units while the number of new 52-week highs out did the new lows on all four days. Breadth was also positive at the NASDAQ as the A/D line gained 764 units while the number of new highs beat the new lows on each session. Finally, the percentage of stocks above their 50-day moving average fell to 81.8% vs. 84.6% the previous week, while those above their 200-day moving average eased to 89.3% vs. 90.2%. 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. In addition, we track money flows into and out of Equity Funds and ETFs which as of 12/16/20 shows outflows of $11.8 billion. Currently, the Sentiment Index is Negative at -3, up two notches 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 11/13/2020 (DJIA – 29479.81). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | 11 | 12 | Positive | ||||||
| Momentum Index: | 6 | 6 | Positive | ||||||
| Sentiment Index: | -3 | -5 | Negative | ||||||
| Strength Index – DJIA (DIA): | 44.8 | 37.9 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 56.3 | 47.9 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 38.7 | 34.4 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 30199.87 | 30179.05 | 0.1% | ||||||
| S&P 500 Index: | , | 3703.06 | 3709.41 | -0.2% | |||||
| NASDAQ Composite Index: | 12804.73 | 12755.64 | 0.4% | ||||||
Ask Mr. Seifert
What is the anatomy of the Basic Strategy – Bull-Bear Credit Spreads?
The Basic Strategy Credit Spreads Trades have favorable outcomes in three out of four possible scenarios and should be profitable in any type of market environment. The following is an example of the possible outcomes of a weekly, bullish put credit spread. The opposite scenarios would apply to bearish, call credit spreads.
Possible Scenarios Results
- Stock closes up, above the short option strike price. Full Win– 100% of the credit amount.
- Stock closes unchanged, at the short option’s strike prices. Full Win– 100% of the credit amount.
- Stock closes down by a small amount (less than 1%). Partial Win– A percentage of the credit amount.
Stock closes down by a large amount. Full Loss – The width of the spread less the amount of the credit.
Example Of A Weekly, Bullish Put Credit Spread:
Stock Price = $100.00
Spread Width = 5.0 Points
Credit Spread = Short Weekly 100.0 Put, Long Weekly 95.0 Put (5.0 Wide Spread).
Spread Credit (40%) = 2 Points or $200.
- Stock Closes Higher – $100.00 or higher. Spread Closes @ 0.0. Full Win $200.
- Stock Closes Unchanged – $100.00. Spread Closes @ 0.0. Full Win $200.
- Stock Closes Lower (-1%) – $99.00. Spread Closes @ 1.0. Part Win $100.
- Stock Closes Lower – $95.00 or lower. Spread Closes @ 5.0. Full Loss $300.
Like a casino, winning is a fine line and is predicated on the percentage amount of credit spread and the correct forecasted direction of the stock. Breakeven results should occur if over time you sell the spread for a 40% credit, are right on the stock’s direction by 52.0% (Full Win) and not wrong by more than 1% – 62.0% (Full & Part Win). If the Full Win percentage increases to 55.7% and the Full & Part Win percentage increase to 66.6%, approximately a 4% improvement, the results should look like the following:
Risk Capital: $3,000 (10 x Maximum Risk Per Trade)
Five Trades Per Week – Full Win = 55.7%. Full & Part Win = 66.6%. Full Loss 33.4%.
- Full Win 8 Trades $5.57
- Part Win .5 Trades $ .55
- Full & Part Win 3 Trades $6.12
- Full Loss 7 Trades $5.01
- Net Weekly Win 0 Trades $1.11
- Weekly % Gain 0 Trades 3.7%
- Annualized % Gain 250 Trades 7%
The ideal situation is when you get the direction of the stock right and have a 40% or higher credit. The second ideal situation is when you get the direction of the stock almost right (small stock loss) and have a 40% or higher credit. The worst situation is when you get the direction of the stock wrong by a lot and have less than a 40% credit.
Credit spread amounts – 40% the width of the spread.
1.0 point wide = $ 0.40
2.0 point wide = $ 0.80
2.5 point wide = $ 1.00
5.0 point wide = $ 2.00
The computer algorithms used to pinpoint stocks for both Long and Short credit spreads are the same that are used to generate identify Long, Neutral and Avoid Opinions on the Market Edge web site. The Market Edge Opinions have a history dating back to 1995. Over that period of time, they have demonstrated a history of being correct better than 70% of the time with the winners outperforming the losers by a 3:1 ratio. Since the holding period for the option selections is very short, usually less than a week, the time periods used in the Market Edge algorithms have been shortened considerably.
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