Record Rally Rolls On
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
| Better than expected Q4 earnings from Money Center banks helped to kick off a rally this week that saw the major averages turn in their best weekly percentage move since early September. The DJIA rode a five-day win streak into the weekend on a broad-based move that left only the Energy (XLE) sector in the dust. Economic data was mixed leaving interest rates little changed, while gold prices firmed. Utilities (XLU) and REITs (XLRE) were the top performing sectors followed by Technology (XLK), Materials (XLB) and Communication Services (XLC). Gains in big cap technology names and the FANG stocks outpaced the broader market. The signing of a ‘Phase 1’ trade deal between the US and China, coupled with the Federal Reserve’s $50 billion intervention in the overnight repo market, another form of quantitative easing, also fueled the market’s rally. The major averages closed out the week at record highs with the Dow a chip shot from 30,000 as investors looked forward to a slew of earnings reports in the coming weeks. For the period, the DJIA jumped 524.33 points (+1.8%) led by Pfizer (PFE), Visa (V), Cisco Systems (CSCO) and Goldman Sachs (GS) and settled at 29348.10. The S&P 500 gained 64.27 points (+2.0%) ending at 3329.62. The NASDAQ traded higher for a sixth consecutive week adding 210.08 points (+2.3%), finishing at 9388.94. The small cap Russell 2000 outperformed and snapped a three-week losing streak surging 42.00 points (+2.5%) and closed at 1699.64.
Market Outlook:The technical condition of the market remained bullish this week and every minor dip continues to be bought. The DJIA, S&P 500, NYSE, NASDAQ, NASDAQ 100 and DJ Utility Index all recorded new record highs. Erasing what had been viewed as negative divergence was the outperformance of the DJ Transportation Index and small cap Russell 2000 which hit new 52-week highs but remained just below their record highs from September 2018. The technical indicators are bullish, momentum is strong, but as has been the case, the different indexes finished the period overbought by several measures. Internal breadth is positive and the NYSE Advance/Decline line, a leading indicator of market direction, punched new highs throughout. There was also big improvement in the NASDAQ Advance/Decline line which had lagged, showing more participation in the NASDAQ’s run. New 52-week highs on the NYSE and NASDAQ continued to expand which is also bullish for the rally. Sentiment however, continues to show that investors are too bullish and complacent. 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 Negative at -3, unchanged from the previous week. The counts for Cycles A, C and D are bullish while the counts for Cycles B and E are bearish. The CTI is expected to remain in negative ground until the second week of February. 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 +5, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 3260 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also positive at the NASDAQ as the A/D line gained 2628 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 jumped to 76.6% vs. 68.3% the previous week, while those above their 200-day moving average increased to 74.6% vs. 70.5%. 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 1/15/20 shows outflows of $1.1 billion. Currently, the Sentiment Index is Negative at -5, unchanged from the previous week. Industry Group Rankings : What’s Hot (62) – What’s Not (29). Of the 91 Industry Groups that we track, 62 are rated as either Strong or Improving while 29 are regarded as Weak or Deteriorating. The previous week’s totals were 61-30. The following are the strongest and weakest groups for the period ending 1/16/20. Strongest: Semiconductors & Related, Advertising, Pharmaceuticals and Health Care Products. Weakest: Aluminum, Telephone Systems, Heavy Construction and Household Products (Non-Durable). To review all of the Industry Group Rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 1/16/20 were: Blend-Small Cap (+4.50%), Sector-Alternative Energy (+4.41%), Growth-Small Cap (+3.04%), Sector-Utilities (+2.89%) and Sector-Technology (+2.55%). The weakest categories were: Shorts (-2.81%), Commodity-Energy (-1.95%), Commodity-Blend (-1.04%), Sector-Energy (-0.92%) and Commodity-Agriculture (-0.73%). To review all the categories in the Market Edge universe, click on the ETFs tab. Calendar of Technical Events:
**The above listed technical events occurred for the DIA on the date indicated. DIA is the ETF for the Dow Jones Industrial Average (DJIA).
Market Posture Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bearish as of the week ending 1/03/2020 (DJIA – 28634.88). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
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| Market Timing Models | Current Reading | Prior Week | Connotation | |||||||||||||||||||||||||||||||||||||||||||||||
| Cyclical Trend Index (CTI): | -3 | -3 | Negative | |||||||||||||||||||||||||||||||||||||||||||||||
| Momentum Index: | 5 | 3 | Positive | |||||||||||||||||||||||||||||||||||||||||||||||
| Sentiment Index: | -5 | -5 | Negative | |||||||||||||||||||||||||||||||||||||||||||||||
| Strength Index – DJIA (DIA): | 43.3 | 53.3 | Negative | |||||||||||||||||||||||||||||||||||||||||||||||
| Strength Index – NASDAQ 100 (QQQ): | 51.0 | 58.2 | Positive | |||||||||||||||||||||||||||||||||||||||||||||||
| Strength Index – S&P 100 (OEX): | 41.2 | 47.4 | Negative | |||||||||||||||||||||||||||||||||||||||||||||||
| Dow Jones Industrial Average (DJIA): | 29348.10 | 28823.77 | 1.8% | |||||||||||||||||||||||||||||||||||||||||||||||
| S&P 500 Index: | , | 3329.62 | 3265.35 | 2.0% | ||||||||||||||||||||||||||||||||||||||||||||||
| NASDAQ Composite Index: | 9388.94 | 9178.86 | 2.3% | |||||||||||||||||||||||||||||||||||||||||||||||
Ask Mr. Seifert
Is it possible to sell a credit spread that has less risk than reward?
Yes, it is possible to sell a credit spread that has less risk than reward. The trade is called a 60/40. It is an aggressive directional spread. Here is how it works. Normally when we sell a credit spread we sell the ATM strike and buy a strike that is further out of the money. If you use a 60/40, we would sell a spread that is slightly in the money. We are not taking a neutral position. We are trying to predict the direction that stock will move. So instead of selling a 5.0 wide spread for $220 and assuming a $280 risk we would sell the spread for $280 and assume a $220 risk. We never risk more than the difference between the strikes minus the premium we collect from the spread. The difference is in the 60/40 spread, if the price doesn’t move in our favor, we will not collect the entire $280. We will collect a portion of the spread as a profit. The 60/40 is a spread that many professional traders use when they are confident that the price will move in their favor.
‘Traders’ And ‘Investors’ Results
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