Virus Wallops Wall Street
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Volatility was off the charts this week as the DJIA suffered its worst weekly percentage loss since 2008 and biggest one-day decline since 1987. In addition, the Dow turned in its two biggest one-day point losses in history. Investors boarded up the house and sold all asset classes as the Covid-19 virus outbreak led to quarantines and travel restrictions around the globe and increased the likelihood that a recession was in the works. There was nowhere to hide, and the tumble was led by a -25% drop in Energy (XLE) after crude oil prices tanked on oversupply and OPEC unable to come to terms on production cuts with Russia. Utilities (XLU), Materials (XLB), Industrials (XLI) and Consumer Discretionary (XLY) were all down more than -11%. Even gold was lower falling -6%. Global markets ended the week in Bear market territory and until companies can get a handle on the extent of the damage to the economy by Covid-19, and how long it will last, further downside can’t be discounted. However, Friday’s relief rally snapped a losing streak of eight straight Friday’s going back to mid-January which could carry over to next week if weekend headlines show some progress in containing the virus. Look for some backing and filling next week as the major averages try to put in a bottom.
For the period, the DJIA suffered its worst week since 2008 dropping 2679.16 points (-10.4%) and closed at 23185.62. The S&P 500 tumbled 261.35 points (-8.8%) to finish at 2711.02. The NASDAQ sank 700.74 points (-8.2%) and finished at 7874.88, while the small cap Russell 2000 lost 240.15 points (-16.6%) and closed at 1209.07. The DJ Transportation Index dropped 1017.38 points (-11.4%) to 7939.40.
Market Outlook:The technical condition of the market continued to deteriorate, and the major averages ended the week as oversold as they’ve ever been. The selloff has nearly erased the rally off the December 2018 lows and in some cases, such as the small cap Russell 2000 and DJ Transportation Index, back to levels not seen since 2016. Support and retracement levels for the major averages have slowed the selloff at times, but not held. Going forward, look for more sharp rally’s and selloffs as the market tries to put in a tradeable bottom. Just don’t expect a V-shaped recovery as the damage to the market has been extensive. We could be looking at weeks before we can say a new uptrend is in place. Breadth was also ugly and on Thursday, the NYSE had 2998 stocks down and only 67 in the plus column, with declining issues carrying 95% of the total volume.
Despite the carnage to stocks, we haven’t had a washout day or selling climax, where the market opens sharply lower, as investors throw the baby out with the bath water, and then rebounds to finish higher on the day. If we get a selling climax, it almost always signals that the low is in. It’s also almost impossible to get orders filled at the price you want when that happens, and you’ll end up buying in much higher than planned. For that reason, investors need to have buy limit orders in at support levels and trend lines for stocks they want to own. You may not catch the bottom, but you’ll be close enough.
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. The counts for Cycles A, B, C and D are bullish while the count for Cycle E is bearish.
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 Negative at -4, down a notch from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 4644 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 fell 5872 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 dropped to 3.9% vs. 15.8% the previous week, while those above their 200-day moving average fell to 6.1% vs. 31.0%. 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 3/11/20 shows outflows of $4.2 billion. Currently, the Sentiment Index is Positive at +7, up four 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.
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | 1 | 1 | Positive | ||||||
| Momentum Index: | -4 | -3 | Negative | ||||||
| Sentiment Index: | 7 | 3 | Positive | ||||||
| Strength Index – DJIA (DIA): | 1.0 | 1.0 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 5.1 | 14.3 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 3.1 | 6.2 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 23185.62 | 25864.78 | -10.4% | ||||||
| S&P 500 Index: | , | 2711.02 | 2972.37 | -8.8% | |||||
| NASDAQ Composite Index: | 7874.88 | 8575.62 | -8.2% | ||||||
| **Connotation is Positive or Negative Divergence from the DJIA | |||||||||
Ask Mr. Seifert
Question: When trading the various Traders selections, what do you recommend as a good exit strategy.
Answer: It is recommended that all of the ‘Traders’ selections be closed at or near Friday’s closing prices. However, there are a few exemptions. If a position doubles in price during the week, it is recommended that the profit be booked, and the position closed. This can occur with the Blow Offs, One Day Wonder, Earnings and SPY trades. In addition, if a Bull-Bear Credit spread drops to $0.05 or less prior to expiration, it is recommended that the trade be closed.
‘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: | 03/13/20 | 2711.02 | S&P 500: | 03/13/20 | 2711.02 | ||
| S&P 500 Points Gain/Loss: | 225.28 | S&P 500 Points Gain/Loss: | 119.92 | ||||
| S&P 500 % Gain/Loss: | 9.1% | S&P 500 % Gain/Loss: | 4.6% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $6,287 | Optionomics Covered Call $ P/L: | $28,066 | ||||
| Optionomics Traders % P/L: | 31.4% | Optionomics Covered Call % P/L: | 28.1% | ||||
| Last Week’s Traders % P/L: | -9.0% | 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: | 03/13/20 | 2711.02 | S&P 500: | 03/13/20 | 2711.02 | ||
| S&P 500 Points Gain/Loss: | -161.85 | S&P 500 Points Gain/Loss: | -196.39 | ||||
| S&P 500 % Gain/Loss: | -5.6% | S&P 500 % Gain/Loss: | -6.8% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $8,383 | Optionomics Billionaire Trade $ P/L: | $4,539 | ||||
| Optionomics Put-Call Hedge % P/L: | 8.4% | Optionomics Billionaire Trade % P/L: | 190.6% | ||||
| Last Week’s Put-Call Hedge % P/L: | 0.0% | Last Week’s Billionaire Trade % P/L: | 0.0% | ||||
‘FREE’ Two-Week Trial Subscription
The option Trades and Strategies offered by the Optionomics Group are unique in that they all have limited risk while creating great leverage. Our basic Bullish – Bearish Credit Spread Trade lets you control 100 shares of a $200 stock, a $20,000 position for less than $500 or 40:1 leverage. Your maximum risk is always limited and our strategies produce winning trades in three out of four possible outcomes. Check out The Scoreboard on the home page to see our results.
Optionomics let you become the casino whereby you have a mathematical edge that enables you to grind out consistent returns. These strategies are designed to produce good returns over short to intermediate-term time frames in any type of market environment.
Optionomics offers a FREE Two-Week trial to its entire web site with no cost or strings attached. Each of the strategies are explained in a 5-7 page booklet which includes detailed explanations and sample recommendations. You can see how the strategies are performing every week by clicking on The Scoreboard tab on the Home page. During the trial, you can paper trade the various strategies and get a feel for the deal without risking a penny. Simply click on the appropriate tab on the Optionomics’ Home page to access the informative booklets and then sign up for the trail. As a special offer, you can download a FREE copy of my latest book, “Trading Options My Way”. I doubt that you have ever read anything like this.
The ‘Traders’ Subscription Includes The Following:
- The Bullish – Bearish Credit Spread Trade: A basic strategy to trading weekly credit spreads.
- The One Day Wonder Trade: A one day trade with great consistency and upside potential.
- The Blow Off Top – Bottom Trade: A lot of action and big moves too.
- The Earnings Season Trade: Potential big movers with little or no downside risk.
The ‘Investors’ Subscription Includes The Following:
- The 21st Century Covered Call Strategy: A modern day alternative to the old fashioned covered call strategy.
- The Low Cost Put-Call Hedge Strategy: Sleep at night knowing your portfolio is protected for little or no cost.
- The Billionaire Risk Reverse Strategy: Big time leverage – small time risk.
Each Monday morning by 11:00 EST, the recommendations for each strategy are posted on the Optionomics’ web site. In addition, the updated results from the previous week are posted on the Optionomics’ Scoreboard. I also have a webinar on Thursday afternoon where I discuss various option strategies, what is happening on the trading floors and answer any questions that you may have. Don’t worry if you miss the show. They are archived on the site. Sound Good? Good! You can subscribe to either the Traders or the Investor plans at an introductory special of only $39.95 each per month on a month to month basis with no contract or strings attached. That’s $10.00 off the regular subscription rate ($49.95). If you subscribe to both it is only $64.95 per month. I think you will agree that this is a super offer so give it a try. Go to www.optionomicsgroup.com and get started today doing what the pros do –
“Don’t Buy Them – Sell Them”.
Mr. Seifert