Wall Street Walloped
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
| It was an ugly week that went from bad to worse. Global markets dropped double-digits and the S&P 500 suffered the fastest market correction in history. Every sector was down sharply led down by big drops in Energy (XLE -15.37%), Financials (XLF -13.42%), Materials (XLB -12.50%, REITs (XLRE -12.21%) and Industrials (XLI -11.87%). Investors watched the Coronavirus outbreak spread globally and rushed to haven bonds sending yields to record lows. The yield on the 10-year Treasury fell to 1.15%. The CME Group Fed Watch now projects a 100% chance of a 25bps and 90% chance of a 50bps cut in March. The market meltdown saw the DJIA turn in its biggest one-day point drop in history on Thursday as the blue chip index tumbled 1190.95 points (-4.42%), and nearly matched it at the open on Friday falling 1085 points at the bell. The Dow traded down to its lowest level since January 2019, nearly wiping out last year’s rally. The major averages staggered into the weekend oversold by any measure with the S&P Short Range Oscillator hitting -12.73% on Friday. That was the most oversold the market has been since August 2011 when the European debt crisis hit global markets. Despite the selloff, Friday’s back and forth trading on heavy, heavy volume showed that institutions were moving back into the market. If we get through the weekend without any surprises from the Coronavirus, we’re likely to get a sharp snapback rally on Monday on hopes that the worst is over.
For the period, the DJIA tumbled for a second straight week dropping 3583.05 points (-12.4%) and landed at 25409.36. The S&P 500 fell 383.53 points (-11.5%) to finish at 2954.22. The NASDAQ dropped 1009.22 points (-10.5%) and finished at 8567.37, while the small cap Russell 2000 slid 202.18 points (-12.0%) and closed at 1476.43. The DJ Transportation Index was the weakest index losing -13.9% and trading at its lowest level since December 2018. Market Outlook:The technical condition of the market deteriorated last week as the major averages went from record highs last Thursday, to a correction and their lowest level since the summer of 2019. It was the biggest weekly selloff since 2008. The technical indicators all fell into bearish ground and were at some of the lowest marks in years, indicating an extremely oversold condition. All of the major averages had broken their respective 200-day moving average by Friday but the NASDAQ and Philadelphia Semiconductor Index showed positive divergence and closed the week back above that critical support area. The DJIA retraced 61.8% of the rally off the December 2018 bottom and the S&P 500 has retraced 50%. The NASDAQ and Philadelphia Semiconductor Index, which have outperformed the broader market, hadn’t reached the 50% retracement level yet, but if the selloff continues next week that would be a logical downside target. That would indicate that the NASDAQ could reach 8,000 if selling persists. Breadth was ugly with the Advance/Decline lines for the NYSE and NASDAQ dropping sharply and the number of new 52-week lows hitting the highest numbers since the lows of December 2018. 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 Positive at +1, after being adjusted from the previous week. The counts for Cycles A, B, C and D are bullish while the count for Cycle E is bearish. The CTI was reset to a positive +7 the week ending 2/07/20 after it looked like the selloff ending 1/31/20 was the end of Cycle A & B. However, with this week taking out the low of 1/31/20, the cycles were extended. The extension still leaves the cycles in their range and the CTI will be reset the first week that the market doesn’t make a lower low. Take a look at this week’s “Tech Talk” for a more detailed explanation. 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 +11, up four notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 9823 units while the number of new 52-week lows out did the new highs on all five days. Breadth was also negative at the NASDAQ as the A/D line dropped 9253 units while the number of new lows beat the new highs on each day. Finally, the percentage of stocks above their 50-day moving average fell to 10.7% vs. 54.3% the previous week, while those above their 200-day moving average dropped to 26.5% vs. 66.3%. 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 2/26/20 shows outflows of $22.1 billion. Currently, the Sentiment Index is Positive at +3, up three notches 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 2/28/2020 (DJIA – 25409.36). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below. Industry Group Rankings : What’s Hot (16) – What’s Not (75). Of the 91 Industry Groups that we track, 16 are rated as either Strong or Improving while 75 are regarded as Weak or Deteriorating. The previous week’s totals were 44-47. The following are the strongest and weakest groups for the period ending 2/27/20. Strongest: Semiconductors & Related, Internet-Retail, Telephone Systems and Automobile Manufacturing. Weakest: Oilfield-Equipment, Aluminum, Diversified Mining and Coal. To review all of the Industry Group Rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 2/27/20 were: Shorts (+21.65%), Bond-Government Long Term (+2.31%), Bond-Government-Intermediate Term (+0.90%) and Bond-Multisector Aggregate (+0.52%). The weakest categories were: Blend-Small Cap (-17.48%), Sector-Financial (-16.13%), Sector-Energy (-16.01%), Sector-Technology (-12.08%) and Sector-Alternative Energy (-11.95%). To review all the categories in the Market Edge universe, click on the ETFs tab.
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Ask Mr. Seifert
Why is market psychology so important to success as a trader or investor?
I am going to continue the theme about market psychology and why it is so important for traders and investors. Previously I talked about the other side of the trade and how trades are initiated. This week I want to talk about discipline. It is the second principal that a trader must learn after they understand that the market is an auction and there must be a buyer for every seller and vice versa. There is no silver bullet that prints money. Trading is a probability game and as such, some wild things are going to happen. Let’s say that you follow Market Edge which has had a phenomenally accurate prediction record for the past 25 years. Even if it picks 70% winners, you are still going to have losing periods where nothing goes right. If you quit trading every time that it hits a slump, you will be around for the losers but will miss out on the winners. When you trade or invest you must be willing to accept the inevitable drawdowns that are part of the business. Even Warren Buffett takes beatings from time to time and if he quit every time things went sour, you wouldn’t know his name!
‘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: | 02/28/20 | 2954.22 | S&P 500: | 02/28/20 | 2954.22 | ||
| S&P 500 Points Gain/Loss: | 468.48 | S&P 500 Points Gain/Loss: | 363.12 | ||||
| S&P 500 % Gain/Loss: | 18.8% | S&P 500 % Gain/Loss: | 14.0% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $8,394 | Optionomics Covered Call $ P/L: | $27,437 | ||||
| Optionomics Traders % P/L: | 42.0% | Optionomics Covered Call % P/L: | 27.4% | ||||
| Last Week’s Traders % P/L: | -0.4% | Last Week’s Covered Calls % P/L: | -0.9% | ||||
| 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: | 02/28/20 | 2954.22 | S&P 500: | 02/28/20 | 2954.22 | ||
| S&P 500 Points Gain/Loss: | 81.35 | S&P 500 Points Gain/Loss: | 46.81 | ||||
| S&P 500 % Gain/Loss: | 2.8% | S&P 500 % Gain/Loss: | 1.6% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $8,013 | Optionomics Billionaire Trade $ P/L: | $4,429 | ||||
| Optionomics Put-Call Hedge % P/L: | 8.0% | Optionomics Billionaire Trade % P/L: | 186.0% | ||||
| Last Week’s Put-Call Hedge % P/L: | -2.7% | Last Week’s Billionaire Trade % P/L: | -25.5% | ||||
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