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).
Hawkish Fed Corrals Bulls
Despite cooler inflation data that was cheered by investors, tough talk from Fed officials on rate hikes left the major averages lower this week. Market participants were cautious to start the week before the October Producer Price Index (PPI) on Tuesday confirmed that inflation pressures may have peaked. The core-PPI was flat vs. +0.3% expected and +6.7% YoY vs. +7.2% estimated sending yields lower and equities higher. Gains in big cap tech names Alphabet (GOOGL), Microsoft (MSFT) and Meta Platforms (META) coupled with better-than-expected earnings from Walmart (WMT) and Home Depot (HD) helped the major averages finish the session with solid gains with the NASDAQ jumping 162.19-points (+1.45%). Soft manufacturing and housing data midweek revived recession fears as Fed President’s Chris Waller and James Bullard were out with hawkish comments on rates. Waller remarked that a pause in rate hikes was off the table and a series of 0.50-point increases in yields might be appropriate to rein in inflation. Bullard signaled higher rates were still needed noting that rate hikes have had a limited effect on inflation and even dovish assumptions about the state of monetary policy warrant further increases. The major averages struggled as investors stayed defensive despite solid earnings from the likes of Macy’s (M), Cisco Systems (CSCO) and Lowe’s (LOW). Stocks were able to battle back on Friday on strength in defensive sectors Consumer Staples (XLP), Utilities (XLU) and Healthcare (XLV) as investors hoped the stock market could find firmer footing going into the holidays. Yields inched higher during the week with the 10-year T-Bill rate finishing the period at 3.82% and the two-year Treasury landing at 4.51%. The inverted yield curve between the two and 10-year rate was its widest since 2002, while the three-month T-Bill yield is also inverted with the 10-year keeping recession fears in the rearview mirror. That pulled crude oil prices lower on demand concerns and the December Crude Oil contract dipped briefly below $80 a barrel on Friday for the first time since the end of September. As mentioned, traders were on defense with the Utilities (XLU), Consumer Staples (XLP), Healthcare (XLV) the only market sectors able to post positive during the week, while Consumer Discretionary (XLY), REITs (XLRE), Energy (XLE), Materials (XLB) and Financial (XLF) were the laggards. The different indexes were able to bounce on Friday, but not enough to erase the losses from earlier in the week leaving the major averages lower for the second time in three weeks.
For the period, the DJIA eased 2.17 points (-0.0%) and settled at 33745.6. The S&P 500 gave up 27.59 points (-0.7%) and closed at 3965.34. The NASDAQ lost 177.27 points (-1.6%) finishing at 11146.06. The small cap Russell 2000 dropped 33.01 points (-1.8%), finishing at 1849.73.
Market Outlook: The technical condition of the market was little changed this week but remained positive. The major averages struggled at key resistance areas but held key support levels during intraday weakness. The technical indicators are in positive ground with several indexes working off overbought conditions after the previous week’s spike. The different indexes traded in a narrow range for most of the period with selling well contained as investors bought the dips. The DJIA outperformed and flirted with its August high after breaking above a downward sloping long-term trend line and remains above its 200-day MA. The S&P 500 remains positive but failed to make much progress this week. After failing at its 61.8% retracement of the August-October selloff on Tuesday, the bellwether index bounced off support at its rising 100-day MA on Thursday keeping bullish momentum. The NASDAQ rally stalled at its 100-day MA during the week, and its reversal was held in check by its 50-day MA keeping the uptrend intact. The secondary indexes, which market technicians would like to see lead the stock market higher and lower, showed some negative divergence this week however, as the DJ Transportation Index and small cap Russell 2000 were unable to hold support at their respective 200-day MA. The Philadelphia Semiconductor Index rally stalled just below its 200-day MA on Tuesday but bounced off its 100-day MA on Thursday. That should be looked at as a positive however, after a +26% spike off the 11/03/22 intraday low through Tuesday’s high. The VIX traded in a narrow range in the low 20’s throughout the period hinting that traders don’t see a bigger correction coming over the near-term. Underlying breadth was slightly negative with both the NYSE and NASDAQ Advance/Decline lines showing stocks were under distribution. New 52-week lows outnumbered new highs but contracted on the NASDAQ, but the new highs outdid the new lows on three days on the NYSE. Investor Sentiment saw an uptick in the number of Bulls. The National Association of Active Investment Managers (NAAIM) Exposure Index jumped to 65% exposure to equities, up from 54.6% the previous week, while according to Investors Intelligence, the Percentage of Bullish Investment Advisors topped the Bearish Advisors for the first time since mid-September. Finally, the retail investor seems to be climbing on board. The American Association of Individual Investors (AAII) showed 33.5% of retail investors are bullish, up from only 25.1% prior. That is below the historical average of 37.5%, but it is the higher showing for the bulls since the week ending 12/31/2021!
After bouncing off the October lows a look at the different sectors might help investors determine where they need to be if an end of year rally unfolds. Of the 11-sectors followed, six are currently rated Long by Market Edge and carry a 50-day RS above 1 meaning they are outperforming the S&P 500. Ranked strongest to weakest by Relative Strength they are Energy (XLE), Industrials (XLI), Financials (XLF), Materials (XLB), Healthcare (XLV) and Consumer Staples (XLP). According to Sam Stovall, chief investment strategist at CFRA and author of The Standard & Poor’s Guide to Sector Investing, excluding Industrials and Financials, these sectors have historically done well late in the business cycle as the economy weathers slowing growth, rising rates and increasing signs that a recession may be in the forecast. All of the above sectors are currently trading above their respective 200-day MA and investors could look to rotate into these on market weakness, keeping an eye on key moving average support levels. Keep in mind your long-term investment goals and know that risks remain with market uncertainty. 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 +10, unchanged from the previous week. Cycles B, C and D are bullish, while Cycles A and E are bearish. The CTI is projected to remain in a positive configuration into December.
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, unchanged from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 959 units while the number of new 52-week highs exceeded the number of new lows on three sessions. Breadth was negative at the NASDAQ as the A/D line dropped 2132 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 71.7% vs. 73.2% the previous week, while those above their 200-day moving average fell to 39.4% vs. 41.6%. 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 Neutral 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 11/16/22 shows inflows of $14.6 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 10/21/2022 (DJIA – 31082.6).
Ask Mr. Seifert
Question: When trading the various ‘Traders’ selections, what is a good exit strategy.
Answer: It is recommended that all of the ‘Traders’ selections be closed at or near Friday’s closing prices. However, there are a few exemptions. If a position doubles in price early in the week, it is recommended that the profit be booked and the position closed. This can occur with the Blow Offs, One-Day Wonder and SPY trades. In addition, if a Bullish or Bearish Credit spread drops to $0.05 or less prior to expiration, it is recommended that the trade be closed.
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