Rebound Hits Record High
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
| After getting the shakes from the Coronavirus the previous week, the major averages rallied back hard and were able to hit new all-time highs this week. Led by big cap technology names, the market put together a four-day win streak that saw the DJIA surge 1123.74-points (+4.0%) before taking a breather and coming off those highs heading into the weekend. Better than expected PMI Mfg. and Non-Mfg. numbers, combined with solid earnings reports and China’s People’s Bank injecting more liquidity into the banking system, offset fears of a global slowdown from the Coronavirus. The rally was broad based with the Technology (XLK) sector spiking +5.0%. Materials (XLB), Healthcare (XLV), Communication Services (XLC) Industrials (XLI) and Financials (XLF) were all up more than +3%. Utilities (XLU) was the only sector finishing lower. The US dollar hit a new 52-week high weighing on commodities and crude oil prices briefly fell below $50 a barrel and remained in a Bear market after trading down for five straight weeks. Despite a bounce during the week, Emerging Markets also struggled on strength in the dollar and the iShares Emerging Markets ETF (EEM) closed the week below its 50-day moving average. Despite the strength of the markets snap-back rally, with earnings season wrapping up and valuations once again returning to the forefront, the major averages may struggle to move higher over the next few weeks as investors and analysts wrestle with how China’s shutdown and lingering Coronavirus fears will affect Q1 growth and earnings here and abroad.
For the period, the DJIA was able to snap a two week losing streak jumping 846.48 points (+3.0%) and settled at 29102.51. The S&P 500 added 102.19 points (+3.2%) to finish at 3327.71. The NASDAQ outperformed, gaining 369.57 points (+4.0%) and finishing at 9520.51, while the small cap Russell 2000 picked up 42.72 points (+2.6%) and closed at 1656.78. Market Outlook:The technical condition of the market improved during the week as the DJIA, S&P 500, NASDAQ and NASDAQ 100 all rallied back to new record highs. However, as the week ended, there were signs that the rally may be running on fumes. The technical indicators for the Dow, S&P 500 and NASDAQ were back in bullish ground, but the 14-day RSI for the different indexes was showing negative divergence. The technical indicators for the small cap Russell 2000 and Philadelphia Semiconductor Index were in neutral ground, but negative for the DJ Transportation Index and none of these indexes made it back to their previous highs. In addition, the transports ended the week back below its 50-day moving average as airlines and cruise ships still suffered from Coronavirus concerns on travel and was only able to retrace about 50% of the selloff from the January high. The Russell 2000 closed the week right on its 50-day moving average and a dip below that support level to start the week would be a red flag. Finally, breadth was positive with the NYSE and NASDAQ Advance/Decline lines showing accumulation, while new 52-week highs expanded during the week. 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 -4, down a notch 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 for at least one additional week providing. 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 +3, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2256 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 added 3483 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 56.6% vs. 49.0% the previous week, while those above their 200-day moving average increased to 66.7% 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 2/05/20 shows inflows of $3.4 billion. Currently, the Sentiment Index is Neutral at +0, unchanged from the previous week. Industry Group Rankings : What’s Hot (35) – What’s Not (56). Of the 91 Industry Groups that we track, 35 are rated as either Strong or Improving while 56 are regarded as Weak or Deteriorating. The previous week’s totals were 39-52. The following are the strongest and weakest groups for the period ending 2/06/20. Strongest: Semiconductors & Related, Automobile Manufacturing, Household Products (Durable) and Pharmaceuticals. Weakest: Household Products (Non-Durable), Aluminum, Food and Oilfield-Integrated Majors. To review all of the Industry Group Rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 2/06/20 were: Sector-Alternative Energy (+6.95%), Blend-Small Cap (+6.12%), Sector-Technology (+5.61%), Sector-Internet (+5.42%) and Sector-Healthcare (+5.17%). The weakest categories were: Shorts (-5.59%), Bond-Government Long Term (-1.79%) Commodity-Precious Metals (-1.24%) and Bond-Inflation Protected (-1.05%). To review all the categories in the Market Edge universe, click on the ETFs tab. 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
Why is market psychology so important to success as a trader or investor?
Without a doubt the most important aspect of trading or investing isn’t numbers. Everyone has numbers. It is your emotional view of the market that is the key. I have been a trader and investor for over 40 years. I have taught scores of people how to trade and the one common trait that all successful traders and investors have is that they understand how the market works. It has never ceased to amaze me how little veteran traders or investors comprehend when I ask them how a trade takes place. How can you expect to beat the New England Patriots if you don’t know what defense they are in? It is incredible that most experienced traders believe that when the market is rallying it is because there are more “buyers than sellers”. They listen to the media and that is what they tell them is going on during a rally. When the market is breaking, they are told there are more “sellers than buyers”. So, here is my first lesson on market psychology. The market is an auction where buyers and sellers bid and offer for a security or option. For every buyer there must be a seller. When they agree to exchange wealth, it is called “price discovery”. The market is in equilibrium, even if it is only for a few seconds. So how does the market rally if the number of buyers and sellers are the same? The buyers are willing to pay more to get in. When they can’t find any sellers at the price they want they must “bid the market higher”, until they find where the sellers will exchange wealth. First lesson. Don’t listen to the media. They rarely have a clue!
‘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: | 02/07/20 | 3327.71 | S&P 500: | 02/07/20 | 3327.71 | ||
| S&P 500 Points Gain/Loss: | 841.97 | S&P 500 Points Gain/Loss: | 736.61 | ||||
| S&P 500 % Gain/Loss: | 33.9% | S&P 500 % Gain/Loss: | 28.4% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $8,266 | Optionomics Covered Call $ P/L: | $28,318 | ||||
| Optionomics Traders % P/L: | 41.3% | Optionomics Covered Call % P/L: | 28.3% | ||||
| Last Week’s Traders % P/L: | -3.3% | Last Week’s Covered Calls % P/L: | 0.0% | ||||
| 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: | 02/07/20 | 3327.71 | S&P 500: | 02/07/20 | 3327.71 | ||
| S&P 500 Points Gain/Loss: | 454.84 | S&P 500 Points Gain/Loss: | 420.30 | ||||
| S&P 500 % Gain/Loss: | 15.8% | S&P 500 % Gain/Loss: | 14.5% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $11,087 | Optionomics Billionaire Trade $ P/L: | $5,581 | ||||
| Optionomics Put-Call Hedge % P/L: | 11.1% | Optionomics Billionaire Trade % P/L: | 212.1% | ||||
| Last Week’s Put-Call Hedge % P/L: | 1.6% | Last Week’s Billionaire Trade % P/L: | 5.8% | ||||
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