Mr. Seifert Sez For The Week Of 10-12-20

by | Oct 11, 2020 | Mr. Seifert Sez

 

Market Anxiously Await Stimulus

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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).

The major averages continued to rebound this week as most of the indexes had their best weekly gains since the first week in August. The market showed some resiliency as it shrugged some dire warnings from the FOMC meeting about a moderating economy in need of a stimulus while jobless claims remained inflated. Conflicting messaging throughout the week between the White House and Congressional leaders on the state of the stimulus did little to rattle markets, as the President resumed normalized duties following a weekend when he was diagnosed with Covid-19. Volatility picked up as VIX hovered around the 30 area during the start of the week before retreating to the 25 area by Friday. For the second week in a row, all sectors were positive led by gains in Energy (XLE), Materials (XLB) and Utilities (XLU) while Real Estate (XLRE) and Communication Services lagged, but still outperformed during the period. The major averages closed out the week on a high note, as DJ Transportation Index recorded a new all-time high while the small cap Russell 2000 Index surged past prior resistance levels seen back in August and continued to march higher, which is a good sign for the overall market.

For the period, the DJIA jumped 904.09 points (+3.27%) and closed at 28586.90. The S&P 500 added 128.72 points (+3.84%) and settled at 3477.14. The NASDAQ gained 504.92 points (+4.56%) to 11579.94, while the small cap Russell 2000 surged 98.25 points(+6.4%) and finished at 1637.55.

Market Outlook:The technical condition of the market improved last week as all the major averages finished in the plus column for the second straight week. In addition, most of the indexes are trading back above their respective 50-day moving averages (MA). The technical indicators continued to move into positive territory as momentum continues to build while MACD, a short-term trend indicator, crossed further into bullish ground for all the indexes. The small cap Russell 2000 continued to outperform, after rising another +6.9%, while the DJ Transportation added nearly +5.0% during the period on its way to a new all-time high. While the DJ Transportation index is posting new highs, the Dow Industrials may not be too far behind. The Philly Semiconductor Index (SOX) also moved higher as it also closed at a new all-time high. All the sector ETFs are now trading above their 50-day MA, with momentum as indicated by the 14-day RSI, showing improvement across the board.

Market breadth continues to strengthen showing good follow through from the prior week. The NYSE Advance/Declines Line moved higher, as it posted a new all-time on Thursday of this week. The NASDAQ A/D Line also moved higher for the period. The number of new 52-week highs expanded significantly during the period and may be an early indication of a market that is poised to make a run at a new high. Investor sentiment remains neutral.

The only caution sign during the week was the S&P Short Range Oscillator which flashed an overbought condition on Thursday with a reading of 7.38%. Historically, the Oscillator has a good record of calling short-term market tops. Support areas for the DJIA and NASDAQ were tested earlier this week but managed to hold as the week came to a close.

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, unchanged from the previous week. Cycles A, B, D and E are bullish, while Cycle C is bearish. The CTI is projected to move into negative ground during late October 2020.

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 +8, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 3803 units while the number of new 52-week highs out did the new lows on all five days. Breadth was mostly positive at the NASDAQ as the A/D line gained 4076 units while the number of new highs beat the new lows four out of five sessions. Finally, the percentage of stocks above their 50-day moving average jumped to 65.5% vs. 39.7% the previous week, while those above their 200-day moving average increased to 63.9% vs. 52.8%. 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 10/07/20 shows outflows of $6 billion. Currently, the Sentiment Index is Neutral at +1, down 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):     5   5   Positive
Momentum Index:     8   7   Positive
Sentiment Index:   1   2   Neutral
Strength Index – DJIA (DIA):     48.3   20.7   Negative
Strength Index – NASDAQ 100 (QQQ):     48.0   28.6   Negative
Strength Index – S&P 100 (OEX):     39.4   17.0   Negative
             
Dow Jones Industrial Average (DJIA):   28586.90 27682.81   3.3%
S&P 500 Index: , 3477.14   3348.42   3.8%
NASDAQ Composite Index:   11579.94 11075.02   4.6%

 

 **Connotation is Positive or Negative Divergence from the DJIA  
       

Ask Mr. Seifert

Question: What can happen to the various ‘Investors” strategies at expiration and what action should I take?

21st-Century Covered Call Strategy: Long stock, short weekly ATM call, long weekly ATM +2 call:

  1. Stock Position: Stock price up or down                          Hold For 8 Weeks Unless Downgrade
  2. Short Call: If In The Money (ITM)                                   Close Or Let Stock Get Called
  3. If Out Of The Money (OTM)                                           Let It Expire Worthless
  4. Long Call If In The Money (ITM)                                    Close
  5. If Out Of The Money (OTM)                                            Let It Expire Worthless

Low Cost Put-Call Hedge Strategy: Long stock, short weekly ATM put, long weekly ATM -2 put, long 90-day anchor put:

  1. Stock Position: Stock price up or down                          Hold For 12 Weeks Unless Downgrade
  2. Short Put: If In The Money (ITM)                                    Close Or Let Stock Get Called
  3. If Out Of The Money (OTM)                                           Let It Expire Worthless
  4. Long Put: If In The Money (ITM)                                    Close
  5. If Out Of The Money (OTM)                                           Let It Expire Worthless
  6. Long Anchor Put: If In The Money (ITM)                        Hold
  7. If Out Of The Money (OTM)                                           Hold
  8. Billionaire Risk Reversal Strategy – Part #1: Combo Trade: Long 90-day ATM call, short 90-day ATM put, long 90-day ATM -1 put.
  1. Stock Position: Stock price up or down                          Hold For 12 Weeks Unless Downgrade
  2. Long 90-Day Call If In The Money (ITM)                        Close
  3. If Out Of The Money (OTM)                                           Nothing
  4. Short 90-Day Put: If In The Money (ITM)                       Close
  5. If Out Of The Money (OTM)                                           Let It Expire Worthless
  6. Long 90-Day -1 Put: If In The Money (ITM)                   Close
  7. If Out Of The Money (OTM)                                           Let It Expire Worthless

Weekly Call Spread –  Part #2: Short weekly ATM call, long ATM+2 call.

  1. Short ATM Call If In The Money (ITM)                             Close
  2. If Out Of The Money (OTM)                                             Let It Expire Worthless
  3. Long ATM Call: If In The Money (ITM)                             Close
  4. If Out Of The Money (OTM)                                             Let It Expire Worthless

‘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: 10/09/20 3477.14 S&P 500: 10/09/20 3477.14
S&P 500 Points Gain/Loss: 991.40 S&P 500 Points Gain/Loss: 886.04
S&P 500 % Gain/Loss: 39.9% S&P 500 % Gain/Loss: 34.2%
Risk Capital: $20,000 Risk Capital: $100,000
Optionomics Traders $ P/L: $6,650 Optionomics Covered Call $ P/L: $30,831
Optionomics Traders % P/L: 33.3% Optionomics Covered Call % P/L: 30.8%
Last Week’s Traders % P/L: -0.2% Last Week’s Covered Calls % P/L: 0.2%
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: 10/09/20 3477.14 S&P 500: 10/09/20 3477.14
S&P 500 Points Gain/Loss: 604.27 S&P 500 Points Gain/Loss: 569.73
S&P 500 % Gain/Loss: 21.0% S&P 500 % Gain/Loss: 19.6%
Risk Capital: $100,000 Risk Capital: $50,000
Optionomics Put-Call Hedge $  P/L: $28,636 Optionomics Billionaire Trade $ P/L: $212,246
Optionomics Put-Call Hedge % P/L: 28.6% Optionomics Billionaire Trade % P/L: 424.5%
       
Last Week’s Put-Call Hedge % P/L: 2.9% Last Week’s Billionaire Trade % P/L: 15.9%

 

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