Seesaw Week Ends Higher
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A strong start and finish to the week offset a bout of midweek selling and the major averages were able to extend their weekly win streak to three. Volatile trading sent the different indexes sharply higher on Monday ahead of Q3 earnings and the NASDAQ spiked +2.6%. It was mostly downhill from there however, as investors grappled with a surge in coronavirus cases, mixed earnings from the big banks and on again, off again stimulus talks. An upgrade of cyclical stocks by Goldman Sachs sent shares of Caterpillar (CAT) and Boeing (BA) soaring, while strong September Retail Sales gave a boost to the likes of Walmart (WMT), Costco (COST) and Bed Bath and Beyond (BBBY). The sectors were mixed as Industrials (XLI), Technology (XLK), Utilities (XLU) and Communication Services (XLC) outperformed, while REITs (XLRE), Financials (XLF) and Energy (XLE) finished in the red. Yields inched lower and the 30-year mortgage rate fell to a record low of 2.8% pushing the iShares US Home Construction ETF (ITB) to an all-time high. Shares of PulteGroup (PHM), DR Horton (DHI) and Lennar (LEN) all recorded record highs. Positive vaccine trials from Pfizer (PFE) also helped boost investor sentiment as the week ended after the company said its vaccine could be ready by the end of November. The Dow’s three week win streak is the longest since early July, but with the Presidential election just weeks away, the rally is likely to pause over the near term.
For the period, the DJIA added 19.41 points (+0.1%) and closed at 28606.31. The S&P 500 increased 6.68 points (+0.2%) and settled at 3483.81. The NASDAQ gained 91.62 points (+0.8%) to 11671.56, while the small cap Russell 2000 slipped 3.74 points(-0.2%) and finished at 1633.81.
Market Outlook:The technical condition of the market remained positive last week as the DJIA and S&P 500 rose for a third consecutive week and the NASDAQ extended its gains for a fourth straight week. The technical indicators are in bullish ground and momentum, as measured by the 14-day RSI, is positive but has slowed. The stock market continues to see a rotation out of high-priced tech stocks and into cyclical stocks and defensive sectors with Utilities one of this week’s strongest sectors after hitting a recovery high. Although the DJ Transportation Index hit several new highs this week it ended the period lower after dropping -1.27% on Friday. The small cap Russell 2000, which hit a new recovery high on Monday, also finished the week with a small loss. These indexes often lead the market both higher and lower and may be indicating that the rally has paused.
Market breadth remains positive but deteriorated some this week. The NYSE Advance/Decline line, a leading indicator of market direction, posted a new all-time high on Monday, but ended the week slightly lower. The NASDAQ A/D line has also made big gains over the last few weeks but also finished lower. New 52-week highs contracted during the period but remain solid after hitting some of their highest numbers since August last week. Investor sentiment, however, is once again too bullish. Margin debt hit its highest level since August 2018, which was the start of a 20% market selloff, and the National Assoc. of Active Investment Mgrs. (NAAIM) hit its highest level of stock exposure since the week ending 8/26/20. That was right before September’s selloff. These are considered contrarian indicators when they hit extreme levels and can be a warning of near-term market tops.
While the major averages could breakout to new highs if a stimulus package is announced over the next few days, mixed signals in sentiment and the upcoming election could make it a ‘sell the news’ setup. The Market Edge Cyclical Index (CTI) is also projected to move into negative territory soon, which points to the possibility of lower prices over the next few weeks. Although any weakness is likely to be in the -5-7% range, a more cautious approach to the market might be in order over the next few weeks, until after the election. One last note, the performance of the S&P 500 in the three months before votes are cast has predicted 87% of elections since 1928 and 100% since 1984. When returns were positive, the incumbent party wins. If the index suffered losses in the three-month window, the incumbent loses.
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 as early as next week.
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 +7, down a notch from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 1193 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 dropped 894 units while the number of new highs beat the new lows on each session. Finally, the percentage of stocks above their 50-day moving average eased to 63.4% vs. 65.5% the previous week, while those above their 200-day moving average increased to 64.6% vs. 63.9%. 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 10/14/20 shows inflows of $2.4 billion. Currently, the Sentiment Index is Negative at -1, down two notches 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: | 7 | 8 | Positive | ||||||
| Sentiment Index: | -1 | 1 | Negative | ||||||
| Strength Index – DJIA (DIA): | 58.6 | 48.3 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 72.4 | 48.0 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 57.4 | 39.4 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 28606.31 | 28586.90 | 0.1% | ||||||
| S&P 500 Index: | , | 3483.81 | 3477.14 | 0.2% | |||||
| NASDAQ Composite Index: | 11671.56 | 11579.94 | 0.8% | ||||||
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**Connotation is Positive or Negative Divergence from the DJIA |
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Ask Mr. Seifert
Question: What can happen at expiration to the Basic Strategy, Put-Call Spreads and the Blow Off strategies and what action should I take?
Basic Strategy: Bullish Put Credit Spreads: Short weekly expiring ATM put, long weekly expiring ATM -2 put.
- If Stock Closes At Or Above The Short Put SP. Let The Spread Expire Worthless (Profit)
- If Stock Closes Below The Short Put SP. Close The Spread (Possible Loss)
Basic Strategy: Bearish Call Credit Spreads: Short weekly expiring ATM call, long weekly expiring ATM +2 call.
- If Stock Closes At Or Below The Short Put SP. Let The Spread Expire Worthless (Profit)
- If Stock Closes Above The Short Put SP. Close The Spread (Possible Loss)
Bearish Blow Off Tops: Short weekly expiring ATM call, long weekly expiring ATM +2 call and long deferred ITM put.
- a) If Stock Closes At Or Below The Short Call SP. Let The Spread Expire Worthless. Sell or Hold The ITM Put. (Profit)
- b) If Stock Closes Above The Short Call SP. Close The Spread And Sell The ITM Put. (Possible Loss)
Bullish Blow Off Bottoms: Short weekly expiring ATM put, long weekly expiring ATM -2 put and long deferred ITM call.
- a) If Stock Closes At Or Above The Short Put SP. Let The Spread Expire Worthless. Sell or Hold The ITM Call. (Profit)
- b) If Stock Closes Below The Short Put SP. Close The Spread And Sell The ITM Call. (Possible Loss)
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