Flu Fears Fan Growth Concerns
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
| It was another volatile week as mixed earnings and Coronavirus concerns saw stocks down sharply to start the week, rebound and finally, tumble into the weekend. Blowout earnings in big cap technology names Apple Inc. (AAPL), Microsoft (MSFT), Lam Research (LRCX), Tesla (TSLA) and Amazon.com (AMZN) were offset by disappointing reports from 3M (MMM), Pfizer (PFE), Facebook (FB), Visa (V) and big oil companies Chevron (CVX) and Exxon Mobil (XOM). Investors worried about the impact of the Coronavirus on global growth as the outbreak continued to spread and traders were reluctant to hold onto equities ahead of the opening of China’s Shanghai Index on Monday. Utilities (XLU) were the only sector green, while Energy (XLE), Materials (XLB), Communication Services (XLC) and Healthcare (XLV) were all sharply lower. Strength in the US dollar also kept pressure on commodity prices and crude oil prices and copper traded lower with crude oil entering a Bear market down more than -20% from its January high. Yields inched lower on global growth concerns stemming from the Coronavirus and the yield on the 10-year Treasury settled at 1.50% inverting with the 3-month T-Bill. Finally, transportation and travel stocks tumbled as airlines and cruise lines suspended flights and cruises with United Airlines (UAL) and American Airlines (AAL) falling to new 52-week lows. The major averages closed at the lows of the week with the DJIA trading below support at its 50-day moving average. That’s likely to lead to further weakness in the coming week as investors account for the effect the Coronavirus could have on Q1 earnings and revenues.
For the period, the DJIA fell for a second straight week losing 733.70 points (-2.5%) and settled at 28256.03. The S&P 500 dropped 69.95 points (-2.1%) to finish at 3225.52. The NASDAQ lost 163.97 points (-1.8%), finishing at 9150.94. The small cap Russell 2000 lost 48.17 points (-2.9%) and closed at 1614.06. Market Outlook:The technical condition of the market deteriorated during the week with the DJIA and S&P 500 losing their year-to-date gains. The technical indicators for the different indexes are mostly negative with MACD ST, a short-term trend measure, bearish and momentum, as measured by the 14-day RSI, negative except for the NASDAQ and NASDAQ 100. The DJ Transportation Index and small cap Russell 2000 are again showing negative divergence and leading the broader market lower. Both indexes finished the week trading below their respective 50-day moving average (MA), and the DJ Transports bounced off its 200-day MA. In addition, the Philadelphia Semiconductor Index, which has more exposure to China, dropped -7.7% and dropped below its 50-day MA. Despite the two-week selloff, only the transports and small caps are oversold based on stochastic readings below 20. Breadth was negative with the NYSE and NASDAQ Advance/Decline lines trending lower and the NYSE A/D line last hitting a new high two weeks ago. New 52-week highs vs. new 52-week lows also contracted during the week with the NASDAQ showing more new lows than highs on two days. On the plus side, investor sentiment has been reigned in and slipped back into Neutral ground after reaching its highest level since January 2018 the prior week. First downside targets for the DJIA and S&P 500 were hit last week. Secondary levels for the major averages are 27,900-28000 for the Dow, 3150-3180 for the S&P 500 and 8940-9000 for the NASDAQ. 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 C and D are bullish while the counts for Cycles A, 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 Neutral at +1, down two notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 2256 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 3483 units while the number of new highs beat the new lows on three days. Finally, the percentage of stocks above their 50-day moving average dropped to 67.3% vs. 67.3% the previous week, while those above their 200-day moving average eased to 71.0% vs. 71.0%. 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 1/29/20 shows outflows of $6.6 billion. Currently, the Sentiment Index is Neutral at +0, down five notches from the previous week. 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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Ask Mr. Seifert
Is it possible to sell a credit spread that can have 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 and 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 you 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 price will move. So instead of selling a 5.0 wide spread for $220 and assuming a $280 risk we sell the spread for $280 and assume a $220 risk. We never risk more than the difference between the strikes minus the premium we collected on 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
| ‘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: | 01/31/20 | 3225.52 | S&P 500: | 01/31/20 | 3225.52 | ||
| S&P 500 Points Gain/Loss: | 739.78 | S&P 500 Points Gain/Loss: | 634.42 | ||||
| S&P 500 % Gain/Loss: | 29.8% | S&P 500 % Gain/Loss: | 24.5% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $8,923 | Optionomics Covered Call $ P/L: | $28,318 | ||||
| Optionomics Traders % P/L: | 44.6% | Optionomics Covered Call % P/L: | 28.3% | ||||
| Last Week’s Traders % P/L: | -3.3% | Last Week’s Covered Calls % P/L: | -1.0% | ||||
| 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: | 01/31/20 | 3225.52 | S&P 500: | 01/31/20 | 3225.52 | ||
| S&P 500 Points Gain/Loss: | 352.65 | S&P 500 Points Gain/Loss: | 318.11 | ||||
| S&P 500 % Gain/Loss: | 12.3% | S&P 500 % Gain/Loss: | 10.9% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $9,462 | Optionomics Billionaire Trade $ P/L: | $5,428 | ||||
| Optionomics Put-Call Hedge % P/L: | 9.5% | Optionomics Billionaire Trade % P/L: | 206.3% | ||||
| Last Week’s Put-Call Hedge % P/L: | 0.1% | Last Week’s Billionaire Trade % P/L: | -6.9% | ||||
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