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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Major Averages Finish Mixed After Rate Hike
Stocks were on a steady decline during the week on headwinds of a midweek rate hike, debt ceiling concerns, a regional bank crisis, and fears that the economy was headed for a recession. A strong April jobs report, coupled with strong earnings from Apple Co (AAPL) and an upgrade to regional banks from JP Morgan Chase on Friday however, pointed to a US economy that remained resilient and might side-step a recession. The April Jobs report showed 253k added payrolls vs. 180k estimated and the Unemployment Rate ease to 3.4% from 3.6% prior. The major averages were on a four-day losing streak before Friday’s rebound and the DJIA had lost 970.42-points (-2.8%) by Thursday’s close, briefly slipping negative for the year. Investors were reluctant to buy equities ahead of Wednesday’s Fed decision on rates and a 0.25-point hike that didn’t include a word of a pause sent stocks lower again. Yields inched lower during the period but inched higher on Friday with the rate on the 10-year Treasury closing at 3.43% and the two-year T-Bill at 3.90%. Oil prices were also sharply lower early in the week on slowing growth and demand concerns falling below $70 a barrel. Oil was able to rebound on the jobs data to finish at $71.43 a barrel. Market weakness was across the board but Technology (XLK), Utilities (XLU) and Healthcare (XLV) were able to eke out a gain. Energy (XLE) was the worst performing sector, falling -5.76%, followed by losses in Communication Services (XLC), Financials (XLF) and Materials (XLB). After closing out April in the plus column, May is off to a weak start with the DJIA and S&P 500 down for the second time in the last three weeks, while the NASDAQ managed to close slightly higher for a second straight week.
For the period, the DJIA lost 423.78 points (-1.2%) and settled at 33674.38. The S&P 500 fell 33.23 points (-0.8%) and closed at 4136.25. The NASDAQ added 8.83 points (+0.1%) finishing at 12235.41, while the small cap Russell 2000 fell 9.11 points (-0.5%) finishing at 1759.88.
Market Outlook: The technical condition of the market deteriorated this week as the major averages finished the period mixed. In addition, the DJIA and S&P 500 hit a five-week intraday low on Thursday before bouncing back to end the week. The technical indicators are mixed for the major averages with MACD, a short-term trend gauge, negative for the Dow and S&P 500 and neutral for the NASDAQ. Momentum, as measured by the 14-day RSI, is neutral, but holds a positive bias for the NASDAQ. After struggling with support levels during the week the DJIA was able to bounce off its 50-day MA and reclaim its 100-day MA. The S&P 500 also found support near its 50-day MA before the rally on Friday. Significant resistance levels remain in place however with the S&P 500 so far, unable to break above the 4180-4200 area, while the NASDAQ momentum has stalled at 12200-12220 three times since the end of March. As mentioned, several times in the last few weeks, negative divergence continues to show up in the secondary indexes, and this week once again we have mixed signals. The small cap Russell 2000 is down for a third consecutive week and now down for the year, while the DJ Transportation Index traded below the March lows this week before Friday’s rebound took the index back above its 200-day MA. The stock market will need to pick up support from the secondary indexes if the major averages are going to sustain any rally off a possible Fed rate pause. At this stage, the mixed signals leave the market posture Neutral.
Underlying breadth was negative and not supportive of higher prices with the NYSE and NASDAQ Advance/Decline lines continuing to show the majority of stocks under distribution. The NASDAQ A/D line hit a new accumulative low for the year on Thursday. The A/D lines are considered leading indicators of market direction. New 52-week lows outnumbered the new highs on the NYSE and NASDAQ and expanded during the period. The NASDAQ registered 476 52-week lows on Thursday, the most since early March, pointing to narrowing leadership. Investor Sentiment is neutral but both retail and the pros have ticked lower over the last three weeks. The Percentage of Investment Advisors looking for a market correction rose to 30.6%, a five-week high.
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 +2, unchanged from the previous week. Cycles A, B and D are bullish, while Cycles C and E are bearish. The CTI is projected to change to a negative configuration in the next week or two.
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, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 2199 units while the number of new 52-week lows exceeded the number of new highs on four sessions. Breadth was also negative at the NASDAQ as the A/D line dropped 1030 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 slipped to 37.4% vs. 40.4% the previous week, while those above their 200-day moving average fell to 40.3% vs. 44.7%. 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, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 5/03/23 shows outflows of $14 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 5/05/2023 (DJIA – 33674.38).
Ask Mr. Seifert
Is it possible to sell a credit spread that has less risk than reward?
Yes, it is possible to sell a credit spread that has less risk than reward. The trade is called a 60/40. It is an aggressive directional spread. Here is how it works. Normally when we sell a credit spread, we sell the ATM strike and buy a strike that is further out of the money. If you use a 60/40, we would sell a spread that is slightly in the money. We are not taking a neutral position. We are trying to predict the direction that stock will move. So instead of selling a 5.0 wide spread for $220 and assuming a $280 risk we would sell the spread for $280 and assume a $220 risk. We never risk more than the difference between the strikes minus the premium we collect from the spread. The difference is in the 60/40 spread, if the price doesn’t move in our favor, we will not collect the entire $280. We will collect a portion of the spread as a profit. The 60/40 is a spread that many professional traders use when they are confident that the price will move in their favor.
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