September Starts With A Bang
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).
The Bulls charged into September after the best August for the S&P 500 since 1986 but a meltdown in big cap tech stocks left the major averages with the biggest two-day loss since March by the end of the week. The S&P 500 and NASDAQ had hit new record highs on nine of 10 days going into Thursday but a two-day tumble across the board erased the gains back to mid-August. The DJIA and DJ Transportation Index came within about 1% of hitting all-time highs but could not escape the selling going into the Labor Day weekend. However, the indexes outperformed as tech money found its way into cyclical stocks. While economic data continued to improve and jobs numbers showed the unemployment rated had dipped to 8.4%, investors were put off by a lack of progress on the next coronavirus relief package. With the different indexes extremely overbought on narrow leadership, investors sold big cap technology and FANG stocks which suffered heavy losses. Shares of Tesla (TSLA), Apple Inc (AAPL), NVIDIA (NVDA), Facebook (FB) and Amazon (AMZN) were hit hard after more than doubling off the March lows. Most sectors finished in the red with Technology (XLK), Energy (XLE), Communication Services (XLC), Consumer Discretionary (XLY) and Healthcare (XLV) bearing the biggest losses, while Materials (XLB) and Utilities (XLU) eked out small gains. The NASDAQ and small cap Russell 2000 bounced off support at their 50-day moving averages on Friday but the different indexes are likely to struggle a bit more to work off their overbought condition. The major averages firmed late in the day on Friday, but the S&P 500 and NASDAQ both saw their five-week win streaks come to an end.
For the period, the DJIA lost 520.56 points (-1.8%) and closed at 28133.31. The S&P 500 slipped 81.05 points (-2.3%) and settled at 3426.96. The NASDAQ tumbled 382.50 points (-3.3%) to 11313.13, while the small cap Russell 2000 gave up 43.04 points (-2.7%) and finished at 1535.30.
Market Outlook:The technical condition of the market deteriorated last week as the major averages turned in their worst two-day performance since March. The technical indicators slipped back into neutral ground with the MACD, a short-term trend indicator, crossing into a bearish trend for the different indexes. The stretched and overbought condition of the market moved back into a more neutral position, but the major averages could be due for more backing and filling before resuming its longer-term uptrend. The Dow and DJ Transportation Index outperformed the broader market, which is a plus and a rotation into more cyclical stocks could be a catalyst for these indexes to regain positive momentum. While every sector finished the period lower, Financials (XLF) once again struggled to trade above its 200-day MA. A break above that resistance area would also be a plus for equities going forward and establish different leadership.
Breadth deteriorated and has been showing negative divergence and signaling a possible market top for several weeks. The NYSE and NASDAQ Advance/Declines, which are looked at as leading indicators of market direction, topped out on August 12. The A/D lines tend to top out a few weeks ahead of a market selloff warning that underlying equities are under distribution. In addition, new 52-week highs have been anemic for several weeks despite some expansion in the NASDAQ early this week pointing to the narrowness of the recent rally.
Aside from the market being stretched and overbought, investor sentiment, which is looked at as a contrarian indicator, has been sending cautionary signals for several weeks. Sentiment has been indicating that investors had become too complacent with the rally. Despite the rally however, the VIX was also rising showing that traders were getting uncomfortable with prices. Last week I noted that a report from Goldman Sachs showed that short interest was at a 15-year low. This week, FINRA reported that investor margin accounts had reached the highest level since September 2018. That marked the top of a 20% decline in stock prices that ended in December.
This week’s correction is likely to put the major averages in a trading range as market participants begin to look ahead to the Presidential election. A delayed stimulus package is also likely to weigh on stock prices. However, with Central Banks providing support for global markets and positive progress on a treatment and vaccine for Covid-19 it’s doubtful that we’ll see anything more than a 5-10% selloff. Look for an uptick in volatility as September plays out and the major averages consolidate their year to date gains.
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.
Presently the CTI is Positive at +13, unchanged from the previous week. Cycles B, C, D and E are bullish, while cycle A is bearish. The CTI is projected to stay positive into September.
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 +6, up two notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 2141 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also mixed at the NASDAQ as the A/D line fell 1414 units while the number of new highs beat the new lows on each day. Finally, the percentage of stocks above their 50-day moving average fell to 63.3% vs. 69.8% the previous week, while those above their 200-day moving average eased to 55.5% vs. 56.5%. 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. In addition, we track money flows into and out of Equity Funds and ETFs which as of 9/02/20 shows outflows of $8 billion. Currently, the Sentiment Index is Negative at -3, up a notch from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 5/29/2020 (DJIA – 25383.11). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
Cyclical Trend Index (CTI): | 13 | 13 | Positive | ||||||
Momentum Index: | 6 | 6 | Positive | ||||||
Sentiment Index: | -3 | -4 | Negative | ||||||
Strength Index – DJIA (DIA): | 75.9 | 81.8 | Positive | ||||||
Strength Index – NASDAQ 100 (QQQ): | 55.1 | 52.1 | Positive | ||||||
Strength Index – S&P 100 (OEX): | 66.0 | 68.1 | Positive | ||||||
Dow Jones Industrial Average (DJIA): | 28133.31 | 28653.87 | -1.8% | ||||||
S&P 500 Index: | , | 3426.96 | 3508.01 | -2.3% | |||||
NASDAQ Composite Index: | 11313.13 | 11695.63 | -3.3% | ||||||
**Connotation is Positive or Negative Divergence from the DJIA |
Ask Mr. Seifert
Question: How is the track record of the various strategies that are listed in the Scoreboard calculated?
The Traders results are based on $20,000 of risk capital and one spread per selection. Since inception (01/04/19) the largest drawn down from trading all of the selections occurred between 12/06/19 and 05/29/20 which saw a decline from $11,234 on 12/06/19 to $3,527 on 05/29/20. This amounted to a decline of $7,707 or 38.5% of risk capital ($20,000). Based on these results, a more realistic amount of risk capital for the Traders strategies would be around $10,000 which would increase the returns by a factor of 2.
Also, since inception, the results assume one spread per selection, regardless of the maximum amount of risk associated with the position. Therefore, the outcome of a Bullish, 2-Wide Put Credit Spread for a $92 credit and a maximum risk of $108 has the same plus or minus contribution to the overall results as a Blow Off Top trade which has an initial debit of $197 and maximum risk $297. A better way to post the results would be to adjust positions based on maximum risk meaning that in the above scenario, three Bullish Put Credit Spreads would be initiated with maximum risk of $324 for every one Blow Off Top position with maximum risk of $297.
The results for the 21st Century Covered Calls and Low Cost Put Hedge strategies assumes a portfolio of $100,000 which would finance a cash account with a maximum of ten stocks and an average price of $100 per share. The Billionaire Risk Reversal portfolio calculates returns based on a portfolio of $50,000 which would finance a maximum of ten positions.
‘Traders’ And ‘Investors’ Results
‘Traders’ Results | 21st Century Covered Call Results | ||||||
Performance Since Week Ending 1/04/19 | Performance Since Week Ending 11/06/17 | ||||||
S&P 500: | 01/04/19 | 2485.74 | S&P 500: | 11/06/17 | 2591.10 | ||
S&P 500: | 09/04/20 | 3426.96 | S&P 500: | 09/04/20 | 3426.96 | ||
S&P 500 Points Gain/Loss: | 941.22 | S&P 500 Points Gain/Loss: | 835.86 | ||||
S&P 500 % Gain/Loss: | 37.9% | S&P 500 % Gain/Loss: | 32.3% | ||||
Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
Optionomics Traders $ P/L: | $6,520 | Optionomics Covered Call $ P/L: | $32,859 | ||||
Optionomics Traders % P/L: | 32.6% | Optionomics Covered Call % P/L: | 32.9% | ||||
Last Week’s Traders % P/L: | -0.4% | Last Week’s Covered Calls % P/L: | 0.1% | ||||
Put-Call Hedge Results | The Billionaire Risk Reversal Results | ||||||
Performance Since Week Ending 1/26/18 | Performance Since Week Ending 04/12/19 | ||||||
S&P 500: | 01/26/18 | 2872.87 | S&P 500: | 04/12/19 | 2907.41 | ||
S&P 500: | 09/04/20 | 3426.96 | S&P 500: | 09/04/20 | 3426.96 | ||
S&P 500 Points Gain/Loss: | 554.09 | S&P 500 Points Gain/Loss: | 519.55 | ||||
S&P 500 % Gain/Loss: | 19.3% | S&P 500 % Gain/Loss: | 17.9% | ||||
Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
Optionomics Put-Call Hedge $ P/L: | $26,743 | Optionomics Billionaire Trade $ P/L: | $7,018 | ||||
Optionomics Put-Call Hedge % P/L: | 26.7% | Optionomics Billionaire Trade % P/L: | 449.1% | ||||
Last Week’s Put-Call Hedge % P/L: | 1.1% | Last Week’s Billionaire Trade % P/L: | 21.8% |
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