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).
NASDAQ Trips On Tech Earnings
The DJIA took the wheel this week and the blue-chip index drove a 10-day win streak into the weekend. It was the Dow’s longest daily run since August 2017 and pushed the index out of a trading range that had been in place since December 2022. The major averages traded higher focused on solid earnings from banks early in the week but got their biggest boost from a +3.98% jump in shares of Microsoft (MSFT) on Tuesday after the company announced pricing on an AI add on for Office365. Also helping to lift equities was a report out of Goldman Sachs (GS) that put the probability of a recession at 20-25% as the US economy remained resilient with Q2 GDP tracking at +2.3%. The different indexes diverged on Thursday, however, after investors were disappointed in earnings from Tesla (TSLA) and Netflix (NFLX) dragging the NASDAQ down 294.71 points (-2.05%), its worst day since March. The DJIA continued to march higher on strong earnings from Johnson & Johnson (JNJ), International Business Machines (IBM) and Travelers (TRV). Slow summer trading on Friday ended with the major averages mixed for a second day. The market sectors were mostly higher with Energy (XLE), Healthcare (XLV), Financial (XLF) and Utilities (XLU) outperforming and up more than +2%, while Communication Services (XLC), Consumer Discretionary (XLY) and REITs (XLRE) lagged the broader market. Despite a rebound in the US Dollar, crude oil prices were able to nudge higher for a fourth consecutive week ending the period at $76.90 a barrel. Yields were little changed with the 10-year Treasury rate closing at 3.83%, with the two-year T-Bill landing at 4.86% as market participants looked ahead to a probable 0.25-point rate hike at next week’s July FOMC Meeting. A rebalancing in the NASDAQ 100 of the biggest market cap tech stocks on Monday kept downward pressure on the NASDAQ as the week wrapped up and left the tech heavy index lower for the second time in three weeks, but the DJIA and S&P 500 finished higher for a third time in the last four weeks.
For the period, the DJIA jumped 718.66 points (+2.1%) and settled at 35227.69. The S&P 500 picked up 30.92 points (+0.7%) and closed at 4536.34. The NASDAQ slipped 80.89 points (-0.6%) finishing at 14032.81, while the small cap Russell 2000 gained 29.17 points (+1.5%) finishing at 1960.26.
Market Outlook: The technical condition of the market remained bullish this week while the S&P 500 and NASDAQ consolidated recent gains and worked off some of their overbought condition. The DJIA however, finished the period overbought after its 10-day win streak left the blue-chip index less than 5% off its record high and the breakout targets 36300-36800. The upside target for the S&P 500 is 4640-4650. The NASDAQ reached its near-term target of 14400 earlier this week. The technical indicators for the different indexes are mostly bullish, but there was slippage in the MACD, a short-term trend gauge, for the NASDAQ and the Philadelphia Semiconductor Index (SOX), which also saw upside momentum slow to a neutral reading. Although the SOX pulled back after hitting its highest level since January 2022, the small cap Russell 2000 and DJ Transportation Index showed positive divergence and outperformed the major averages which bodes well for equities going forward.
Underlying breadth was positive and supportive of higher prices as the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, showed strong accumulation with the NYSE A/D line at its highest accumulative level since January 2022. New 52-week highs outpaced the new lows on the NYSE and NASDAQ with the new highs on the NASDAQ expanding to their highest numbers since November 2021. Investor Sentiment is bullish but is close to reaching extreme levels, which is becoming a concern. The American Association of Individual Investors (AAII) saw bullish retail investors jump to 51.4%, the most since April 2021, and above the 37.5% average. In addition, The National Association of Active Investment Managers (NAAIM) Exposure Index stands at 99% this week meaning money managers are ‘all in’. The last time this group was this exposed to equities was November 2021 when the NASDAQ topped out. As mentioned last week, these surveys are considered contrarian indicators when they reach extreme levels as it means that everyone is on one side of the trade.
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 +5. Cycles A, B, C and D are bullish, while Cycle E is bearish. It now looks as though the lows on 6/02/23 should have triggered a reset of several cycles and reset the CTI to a bullish connotation. However, with mixed readings from several indicators related to the CTI, the posture was held to Neutral
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 +10, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2073 units while the number of new 52-week highs exceeded the number of new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line added 1145 units while the number of new highs out did the new lows on each session. Finally, the percentage of stocks above their 50-day moving average eased to 78.6% vs. 79.5% the previous week, while those above their 200-day moving average increased to 65.2% vs. 64.6%. 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 Negative at -5, down a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 7/20/23 shows outflows of $2.3 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 7/21/2023 (DJIA – 35227.69).
Ask Mr. Seifert
My advisor says to buy debit spreads since they have less risk than a credit spread. Is he right?
Your broker is referring to the fact that a debit spread will always have less premium risk than a credit spread. However, that doesn’t mean that it has less risk. In fact, it has more risk than a credit spread with the same strike. Here is why. For the debit spread to be profitable it must overcome the premium you paid plus it must move in the price direction that you predicted when you bought it. Even if you are correct in predicting the price movement, it may not move enough to overcome the debit. In short, you have to be right and right. On the other hand, a credit spread can win three ways. The price moves in the direction you predicted, the price doesn’t move at all, or the price moves against you but not as much as the credit you sold. For my money, I would rather have three ways to win and take the larger premium risk. In the long run you can’t beat a credit spread.
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