It Ain’t Over Till Its Over
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Another volatile week saw global equities sink on Monday and the DJIA turned in its worst one-day decline since 1987 dropping 2997.10 points (-12.93%). The major averages staged a tepid rebound on Tuesday as Central Banks coordinated bailouts and began cutting rates aggressively and buying assets to stem the effects of Covid-19 on world economies. Despite announced stimulus plans markets headed south again on Wednesday and except for a tick higher on Thursday tumbled into the weekend. A Friday rally faded midday after New York and New Jersey placed non-essential companies on lockdown and crude oil prices collapsed below $20 a barrel. In addition, the first hedge fund, Ronin Capital, was unable to meet capital requirements on VIX positions and regulators auctioned off the firm’s portfolios. There was nowhere to hide, and the move down was led by selling in REITs (XLRE), Energy (XLE), Industrials (XLI) and Financials (XLF). Investors were afraid to hold equities over the weekend amid Covid-19 headlines and the major averages ended the week on a sour note near the weekly lows.
For the period, the DJIA plunged 4011.64 points (-17.3%) and closed at 19173.98. The S&P 500 tumbled 406.10 points (-15.0%) to finish at 2304.92. The NASDAQ lost 995.36 points (-12.6%) and finished at 6879.52, while the small cap Russell 2000 sank 195.02 points (-16.1%) and closed at 1014.05.
Market Outlook:The technical condition of the market remained weak and the major averages continued to linger in oversold territory. As mentioned, this has been the fastest descent from a new high to a Bear market in history. The DJIA and S&P 500 have erased the rally off the December 2018 low and the small cap Russell 2000 and DJ Transportation Index are trading at levels not seen since January/February 2016. The technical indicators are negative but there was some positive diversion in the 14-day RSI this week for the major averages. We also saw signs that the market could be trying to find a tradeable bottom late in the week as we saw the yield on the 10-year Treasury tick briefly back up to 1%, indicating that traders may be ready to add to risk. The VIX also backed off as traders came to terms with the selloff. In addition, on Thursday, the small cap Russell 2000showed some positive divergence and outperformed the broader market surging +6.81% after falling -42% from its recent high. The small caps often will lead the broader market, both higher and lower, and that move shows some money is moving back into the market. Finally, breadth indicators are looked at as leading indicators and show positive divergence before a bottom or top is in. Breadth remains bearish and shows no sign that a bottom is in place, but the levels have started to contract, perhaps giving a hint that we’re closer to a bottom.
Subscribers to Market Edge have an edge as to when to get back into the market in what looks like could be a historically opportune time to buy stocks. The best way to use Market Edge is to make a list of fundamentally, strong stocks that you like and put them in a Stock Watch list. Wait for the stock’s Opinion to be upgraded to Long or for it to become an Early-Entry Buy candidate. This will take the guesswork out of the buying process. The Market Edge Opinions contain several technical indicators which are weighted in such a way so as to produce the Power Rating (PR), a number that can vary between -55 to +100. Depending on the PR value, the Opinion will be either Long, Neutral or Avoid. One of the components of the Power Rating is our proprietary Up/Down Volume Slope (U/D Slope) which identifies conditions where by the smart or informed money is placing big bets, a good thing to know. Trying to catch a falling knife can be a disaster. Our approach will not get you in at the exact bottom but leaving 5% – 10% on the table is much better than getting clobbered AGAIN! At some point this madness will stop and a great buying opportunity will be at hand.
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, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 2691 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 2414 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 rose to 4.6% vs. 3.9% the previous week, while those above their 200-day moving average fell to 6.0% vs. 6.1%. 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 3/18/20 shows outflows of $14.8 billion. Currently, the Sentiment Index is Positive at +7, unchanged 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 (0) – What’s Not (91). Of the 91 Industry Groups that we track, 0 are rated as either Strong or Improving while 91 are regarded as Weak or Deteriorating. The previous week’s totals were 3-88. The following are the strongest and weakest groups for the period ending 3/19/20. Strongest: Water Utilities, Telephone Systems, Internet-Retail and Retailers-Drug Based. Weakest: Oilfield-Equipment, Airlines, Casinos and Oil-Secondary. To review all of the Industry Group Rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 3/19/20 were: Shorts (+23.55%) and Bond-Government Long Term (+0.03%). The weakest categories were: Sector-Real Estate (-25.52%), Sector-Financial (-21.12%), Blend-Small Cap (-19.19%), Sector-Energy (-18.06%) and Commodity-Energy (-15.51%). 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 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.
**Connotation is Positive or Negative Divergence from the DJIA |
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Ask Mr. Seifert
Question: Typically, there are about five ‘Traders’ selections every week. Why has this number significantly declined over the last few weeks?
Answer: The algorithms used by Optionomics in making the ‘Traders’ selections are developed by Market Edge and have a good history of identifying both long and short-sale candidates. Long selections typically have favorable technical inputs but for whatever reason are in a short-term oversold condition. Conversely, short-sale candidates have bearish technical characteristics and are in a short-term overbought condition. Keep in mind that we are looking for very short-term moves over 1 to 5 days. With the market in a free fall, most stocks have negative technical and get into and stay in an oversold condition. This eliminates the possibility for a good long selection due to the negative technical. Conversely, stocks in a negative technical set up seldom get into an overbought condition. The net result is very few selections which keeps us on the sidelines and in hindsight, is usually a good strategy.
‘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: | 03/20/20 | 2304.92 | S&P 500: | 03/20/20 | 2304.92 | ||
| S&P 500 Points Gain/Loss: | -180.82 | S&P 500 Points Gain/Loss: | -286.18 | ||||
| S&P 500 % Gain/Loss: | -7.3% | S&P 500 % Gain/Loss: | -11.0% | ||||
| 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: | 0.0% | 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: | 03/20/20 | 2304.92 | S&P 500: | 03/20/20 | 2304.92 | ||
| S&P 500 Points Gain/Loss: | -567.95 | S&P 500 Points Gain/Loss: | -602.49 | ||||
| S&P 500 % Gain/Loss: | -19.8% | S&P 500 % Gain/Loss: | -20.7% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $7,452 | Optionomics Billionaire Trade $ P/L: | $4,539 | ||||
| Optionomics Put-Call Hedge % P/L: | 7.5% | Optionomics Billionaire Trade % P/L: | 190.6% | ||||
| Last Week’s Put-Call Hedge % P/L: | -0.9% | Last Week’s Billionaire Trade % P/L: | 0.0% | ||||
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