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).
Dow Hits Seven Month High
Getting mixed signals from Fed officials on rate hikes, coupled with another round of covid lockdowns in China, kept investors defensive to start the week, before the bulls regrouped and sent the DJIA to a seven-month high. The major averages erased a Monday dip on better-than-expected earnings from retailers Best Buy (BBY), Burlington Stores (BURL), Dick’s Sporting Goods (DKS), American Eagle Outfitters (AEO) and Abercrombie and Fitch (ANF) on Tuesday as the NASDAQ led a broad-based rally on the one-year anniversary of its all-time high. The release of the November FOMC Meeting minutes helped boost equities again on Wednesday as a substantial majority of Fed members supported a slower pace of rate hikes going forward. Yields nudged lower with the two-year T-Bill rate easing to 4.48% on Friday. The rate on the 10-year Treasury closed at 3.70%, down from 4.21% on 11/07/22. Crude oil prices were volatile after on-again off-again reports of OPEC increasing production sent crude down to $75 a barrel before closing the period at $77.76. Despite mixed results on Friday, every sector was able to finish the week with gains led by strength in Materials (XLB), Utilities (XLU), Financial (XLF), Consumer Staples (XLP) and Industrials (XLI). The week ended with the major averages positive, and DJIA the first index to trade above its August high as the stock market looked ahead to a heavy dose of economic data next week on inflation.
For the period, the DJIA jumped 601.34 points (+1.8%) and settled at 34347.03. The S&P 500 picked up 60.78 points (+1.5%) and closed at 4026.12. The NASDAQ gained 80.30 points (+0.7%) finishing at 11226.36, while the small cap Russell 2000 added 19.46 points (+1.1%), finishing at 1869.19.
Market Outlook: The technical condition of the market improved this week as the major averages nudged higher with the DJIA hitting its high mark since April and the S&P 500 closing above 4000 for the first time since early September. The technical indicators are positive with MACD, a short-term trend gauge, and Momentum, as measured by the 14-day RSI, bullish for the different indexes. However, the week’s gains left the DJIA and S&P 500 overbought with stochastics in the 90s. The DJIA, DJ Transportation Index and small cap Russell 2000 are trading above their respective 200-day MA, which bodes well for the market going forward, but the S&P 500 finished Friday just below that key MA resistance, while the NASDAQ has yet to clear its 100-day MA. A break above those resistance levels could trigger a short cover rally sending the different indexes up to challenge their August highs. The VIX moved down into the low 20s hinting that traders don’t see a bigger correction coming over the near-term. The VIX last traded below 20 in mid-August. Underlying breadth was mostly positive with both the NYSE and NASDAQ Advance/Decline lines moving higher showing the majority of stocks are under accumulation. New 52-week highs outnumbered new lows for a second straight week on the NYSE and expanded on the NASDAQ but were still less than the new lows. Investor Sentiment was mixed with the Percentage of Bullish Investment Advisors more than the Percentage of Bearish Investment Advisors for a second week, but retail investors took a step back to only 28.9% bullish from 33.5% the previous period, far below the historical average of 37.5%.
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 +8, down two notches 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 -2, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2922 units while the number of new 52-week highs exceeded the number of new lows on three of the four sessions. Breadth was mixed at the NASDAQ as the A/D line added 1663 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 76.4% vs. 71.7% the previous week, while those above their 200-day moving average rose to 46.3% vs. 39.4%. 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 Neutral at +2, up 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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