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 Plunge On Rate Concerns
It was another roller coaster ride for investors as stock prices were whipped higher and lower by earnings, rising rates and ongoing geopolitical events. The major averages took a dive at Monday’s open following a -5.13% overnight drop in China’s Shanghai Index on additional lockdowns to rein in spreading Covid that threatened global growth. The different indexes held support however, and reversed course helped by Twitter (TWTR) accepting a $54.20 a share buyout by Elon Musk. The DJIA reversed a 488-point loss to post a gain of 238.06 points led by strength in big cap technology stocks. The reversal was short-lived as stocks sank again on Tuesday with the NASDAQ, NASDAQ 100 and Russell 2000 setting new closing lows for the year. The NASDAQ dropped 514.11 points (-3.95%) posting its biggest one-day drop since September 2020. Strong earnings from Dow components Microsoft (MSFT) and Visa (V) gave an early 467-point boost to the DJIA on Wednesday before the major averages rolled over and finished mixed weighed down by a bump higher in rates and disappointing earnings from Boeing (BA) and Alphabet (GOOGL). Despite a Q1-First Read GDP of -1.4% vs. +1.0% estimated and down from +6.9% the prior quarter on Thursday, stocks rallied on strength in big cap technology shares after MetaVerse (FB) and Qualcomm (QCOM) delivered upbeat earnings results. The volatile session saw the DJIA close with a 614.46 point (1.85%) gain, while the NASDAQ soared +3.06%. That rally vanished on Friday after Apple Co (AAPL) lowered guidance and Amazon (AMZN) dropped -14% after a big miss in earnings and recording its first quarterly loss in seven years. The different indexes limped into the weekend with the DJIA down for a fifth consecutive week and the S&P 500 and NASDAQ extending their weekly losing streaks to four. It was the worst month for the S&P 500 since March 2020 and the NASDAQ’s worst percentage performance since Oct 2008.
For the period, the DJIA fell 834.00 points (-2.5%) and settled at 32977.40. The S&P 500 lost 139.85 points (-3.3%) and closed at 4131.93. The NASDAQ dropped 504.65 points (-3.9%) finishing at 12334.64. The small cap Russell 2000 gave up 76.56 points (-3.9%), finishing at 1864.10.
Market Outlook: The technical condition of the market deteriorated again this week as the major averages traded down and extended their weekly losing streaks. The technical indicators for the different indexes are negative with MACD, a short-term trend gauge, in bearish territory and Momentum, as measured by the 14-day RSI, negative. The major averages are all trading below their 200 and 50-day moving averages (MA), confirming the downtrend. The different indexes finished the period oversold by several measures with stochastics below 20, and in the case of the NASDAQ in single digits. The Market Edge/S&P Short Range Oscillator (SRO) ended Friday at an oversold -5.76% which historically has led to some buying from market participants. Market weakness was pretty much across the board with every sector closing the week in the red. Big losses in Tesla (TSLA) and Amazon (AMZN) led to the Consumer Discretionary (XLY) sector losing -7.36%, while even defensive sectors, which had outperformed over the last few weeks, finally caving in. REITs (XLRE), Utilities (XLU), Financials (XLF) and Communication Services (XLC) were the other laggards. Underlying breadth remains weak with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, continuing to lose ground, while stocks making new 52-week lows outnumber new highs by a wide margin, matching some of the high totals of the year. Investor sentiment remains overly bearish and this week we saw the professionals take a step back as the National Association of Active Investment Managers (NAAIM) Exposure Index dropped to 46.3%, down from 83.4% just three weeks ago.
Next week the May FOMC Meeting gets underway and to battle soaring inflation, most analysts are looking for a hawkish Fed to aggressively raise rates. As of Friday, the CME Group FedWatch put the chance of a 0.50-point hike at 99.1% and a 96.9% probability of a 0.50-point rise in June. Although some economists see inflation peaking here due to China’s lockdown and slowing growth, the same CME group sees a 94% chance of another 0.50-point hike in July. Fed Chair Jerome Powell will give testimony on Wednesday on how the committee intends to raise rates, navigate a soft landing and avoid a recession. The stock market is worried that if the Federal Reserve raises rates too fast it will slam the door on economic growth and throw the economy into a recession. Several Fed officials feel that ‘this time things are different’ and that a strong jobs market and solid corporate earnings growth will help the economy weather rapidly rising rates. I don’t know, I’m hoping for the best, but I always cringe when I hear, ‘this time things are different’.
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 +9, 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 Bullish configuration until June.
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 Neutral at -3, down a notch from the previous week. Breadth was negative at the NYSE as the Advance/Decline line fell 2807 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 lost 4456 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 fell to 31.3% vs. 44.5% the previous week, while those above their 200-day moving average slipped to 31.7% vs. 38.6%. 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 +5, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 4/27/22 shows outflows of $8.8 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 4/29/2022 (DJIA – 32,977).
Ask Mr. Seifert
Question: How Do You Calculate The Probability Of Profit (POP) For A Vertical Credit Spread When Using the Think Or Swim (TOS) Platform?
Answer: The key element when calculating POP is the Break-Even (BE) price of the credit spread. For example, if you sell a Bullish 100.0 – 95.0 vertical put credit spread for a $2.00 credit (40%) when the underlying is trading at $100.00, the POP calculation is as follows: Subtract the $2.00 credit from the short put strike price (100.0) to get the BE price ($98.00) for the trade. If the underlying settles at $98.00 or higher, the trade will make at least a $0.01 profit. Now click on the Analyze tab and enter the symbol for the underlying. Put the cross hair on the expiration date at the bottom of the chart (x axis) and scroll to the breakeven price on the left side of the graph (y axis). The percentage above the BE price line is the POP for the bullish, put-credit spread.
If you are initiating a Bearish 100.0 – 105.0 vertical call-credit spread, add the credit ($2.00) to the short call strike price (100.0) to get the BE price ($102.00) for the trade. If the underlying settles at $102.00 or lower, the trade will make at least a $0.01 profit. Check the TOS, Analyze screen. The percentage below the BE price line is the POP for the bearish call-credit spread.
Bullish Vertical Put Credit Spread: 1) Subtract The Credit From Short Put SP = BE Price. 2) The % Above The BE Price On The Analyze Screen Is The POP For The Trade.
Bearish Vertical Call Credit Spread: 1) Add The Credit To The Short Call SP =BE. 2) The % Below The BE Price On The Analyze Screen Is The POP For The Trade.
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