Mr. Seifert Sez For The Week Of 10-26-20

by | Oct 25, 2020 | Mr. Seifert Sez

 

Deal Or No Deal

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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 were stymied by a lack of progress on a coronavirus relief stimulus package this week. Economic data was mostly better than expected with jobs numbers continuing to improve, while Q3 earnings also mostly beat expectations. Despite pockets of strength and weakness, the different indexes snapped their three-week win streak as congress was unable to come to terms on further stimulus. The major averages dropped hard to start the week and were never able to regain the opening tumble. Rotation into cyclical names helped offset selling in big cap tech names, and Technology (XLK) was the weakest market sector. Yields on the 10-year Treasury jumped to .85% giving a boost to financial stocks as the yield spread widened, but investors sold yield-sensitive sectors REITs (XLRE) and Consumer Staples (XLP). Utilities (XLU) however, rose on strength in Alternative Energy shares. Energy (XLE), Financials (XLF) and Communication Services (XLC) also outperformed. Choppy trading left the DJIA and S&P 500 marginally lower for the first time in three weeks, while the NASDAQ snapped a four-week win streak. Look for more volatility tied to stimulus headlines next week as investors balance rising Covid-19 cases, mostly better than expected Q3 earnings and the upcoming election.

For the period, the DJIA lost 270.74 points (-0.9%) and closed at 28335.57. The S&P 500 fell 18.42 points (-0.5%) and settled at 3465.39. The NASDAQ slipped 123.28 points (-1.1%) to 11548.28, while the small cap Russell 2000 gained 6.69 points (+0.4%) and finished at 1640.50.

Market Outlook: The technical condition of the market deteriorated last week as the major averages traded lower. The technical indicators slipped into neutral ground but inched higher as the week ended. The DJIA and S&P 500 flirted with their respective 50-day moving average on Thursday, but held above that much watched support area. On the positive side was the outperformance of the DJ Transportation Index and small cap Russell 2000, which finished the period in the plus column. Momentum, as measured by the 14-day RSI, remains positive for the two indexes and strength here is bullish for the market.

Market breadth was mixed this week. The NYSE Advance/Decline line, a leading indicator of market direction, nudged higher, but the NASDAQ A/D line inched lower for a second consecutive week. The number of stocks hitting new 52-week highs contracted and are at levels seen the last week of September after the market selloff. Investor sentiment still seems too complacent with Margin Debt at its highest level since August 2018 before a 20% correction and the Percent of Bullish Investment Advisors was at its highest level since the first week of September. These are contrarian indicators that can be a warning of near-term tops in the market.

Despite signs that we could be looking at a short-term pullback in the market, if a stimulus package is passed, we’re likely to see the stock market spike higher temporarily. However, with the election days away, and the Market Edge Cyclical Index (CTI) moving into negative territory, a ‘sell the news’ mentality may hit the major averages. Q3 earnings and economic data continue to show an economy on the mend but with Covid-19 cases hitting new highs investors may want to take a more cautionary stance until we see if support levels in the different indexes are going to hold or, we start to see some improvement in the underlying technical indicators and breadth in the market.

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 Negative at -1, down six notches from the previous week. Cycles D and E are bullish, while Cycles A, B and C are bearish. The CTI is projected to remain in negative ground into.

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 -1, down eight notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 739 units while the number of new 52-week highs out did the new lows on all five days. Breadth was mixed at the NASDAQ as the A/D line dropped 249 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 62.7% vs. 63.4% the previous week, while those above their 200-day moving average increased to 66.2% 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. In addition, we track money flows into and out of Equity Funds and ETFs which as of 10/21/20 shows outflows of $5.7 billion. Currently, the Sentiment Index is Negative at -1, unchanged from the previous week.

Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Neutral as of the week ending 10/23/2020 (DJIA – 28335.57). 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):     -1   5   Negative
Momentum Index:     -1   7   Neutral
Sentiment Index:   -1   -1   Negative
Strength Index – DJIA (DIA):     58.6   58.6   Positive
Strength Index – NASDAQ 100 (QQQ):     59.6   72.4   Positive
Strength Index – S&P 100 (OEX):     64.3   57.4   Positive
             
Dow Jones Industrial Average (DJIA):   28335.57 28606.31   -0.9%
S&P 500 Index: , 3465.39   3483.81   -0.5%
NASDAQ Composite Index:   11548.28 11671.56   -1.1%

 

**Connotation is Positive or Negative Divergence from the DJIA

 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.

  1. If Stock Closes At Or Above The Short Put SP. Let The Spread Expire Worthless (Profit)
  2. 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.

  1. If Stock Closes At Or Below The Short Put SP. Let The Spread Expire Worthless (Profit)
  2. 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.

  1. a) If Stock Closes At Or Below The Short Call SP. Let The Spread Expire Worthless. Sell or Hold The ITM Put. (Profit)
  2. 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.

  1. a) If Stock Closes At Or Above The Short Put SP. Let The Spread Expire Worthless. Sell or Hold The ITM Call. (Profit)
  2. b) If Stock Closes Below The Short Put SP. Close The Spread And Sell The ITM Call. (Possible Loss)

 

‘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: 10/23/20 3465.37 S&P 500: 10/23/20 3465.37  
S&P 500 Points Gain/Loss: 979.63 S&P 500 Points Gain/Loss: 874.27  
S&P 500 % Gain/Loss: 39.4% S&P 500 % Gain/Loss: 33.7%  
 
Risk Capital: $20,000 Risk Capital: $100,000  
Optionomics Traders $ P/L: $7,189 Optionomics Covered Call $ P/L: $31,192  
Optionomics Traders % P/L: 35.9% Optionomics Covered Call % P/L: 31.2%  
 
Last Week’s Traders % P/L: 1.7% Last Week’s Covered Calls % P/L: 0.6%  
 
 
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: 10/23/20 3465.37 S&P 500: 10/23/20 3465.37  
S&P 500 Points Gain/Loss: 592.50 S&P 500 Points Gain/Loss: 557.96  
S&P 500 % Gain/Loss: 20.6% S&P 500 % Gain/Loss: 19.2%  
 
Risk Capital: $100,000 Risk Capital: $50,000  
Optionomics Put-Call Hedge $  P/L: $30,424 Optionomics Billionaire Trade $ P/L: $216,770  
Optionomics Put-Call Hedge % P/L: 30.4% Optionomics Billionaire Trade % P/L: 433.5%  
         
Last Week’s Put-Call Hedge % P/L: -0.3% Last Week’s Billionaire Trade % P/L: 22.2%  
             
            
               

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