Rally Runs Out Of Steam
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages roared into the week as more states were on track to begin reopening their economies. The market got another boost on Wednesday after Gilead Science (GILD) announced that their drug Remdesivir had completed testing with positive results in treating Covid-19. The different indexes spiked at the open and then took another leg up in the afternoon after the April FOMC Meeting concluded with rates unchanged and the Federal Reserve promising to use its full range of stimulus tools until they were confident the economy was back on track after the coronavirus outbreak. Despite dismal economic data that saw preliminary Q1 GDP fall -4.8%, earnings from big cap technology names kept investor sentiment upbeat for most of the week. Stocks struggled though on Thursday, after another jump in new jobless claims, but the DJIA and S&P 500 were able to close out April with their biggest percentage gains since 1987. Unfortunately, the rally ran out of steam as the major averages were down sharply on Friday after President Trump threatened to reinstate tariffs on China over the coronavirus pandemic. The sectors ended mixed with Energy (XLE), Materials (XLB), Communication Services (XLC), Financials (XLF) and Technology (XLK) higher, but defensive groups Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) lower. Crude oil prices were able to rebound on hopes that demand would pick up as global economies opened up. The different indexes were able to break through resistance levels early in the week but gave back the gains on another Friday flop and the major averages finished mostly lower for a second straight week.
For the period, the DJIA struggled for a second week easing 67.22 points (-0.2%) and closed at 23775.27. The S&P 500 lost 7.82 points (-0.3%) to finish at 2836.74. The NASDAQ gave up 5.62 points (-0.2%) and finished at 8634.52, while the small cap Russell 2000 outperformed and picked up 3.95 points (+0.3%) to close at 1233.05.
Market Outlook:The technical condition of the market deteriorated last week as the major averages basically took a round trip from Monday to Friday. The technical indicators ended the week in neutral ground but momentum, as measured by the 14-day RSI had slowed. The different indexes were able to bust through resistance levels early in the week but Friday’s selloff did some damage to key moving average (MA) support areas. The DJ Transportation Index and small cap Russell 2000 fell back to their respective 50-day MA and the Philadelphia Semiconductor Index which dropped -5.2% on Friday, fell below its 100 and 200-day MA. The NASDAQ slipped back below its 100-day MA on Friday which is another red flag if stocks are unable to gather upside momentum again next week. Breadth was positive during the week with the NYSE and NASDAQ Advance/Decline lines trending higher after being flat for the past two weeks. New 52-week highs however, contracted during the period and the new lows matched the new highs on Friday.
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 +3, unchanged from the previous week. The CTI was reset as of the week ending 4/03/20 after it appears that the bottom for this cycle was 3/23/20. Cycles B and D are bullish, while cycles A, C and E are Bearish. The CTI is projected to return to a negative count however, the week ending 5/08/20 and remain negative into August which still leaves open possible weakness in the market ahead.
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, down a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 1800 units while the number of new 52-week highs out did the new lows on four of the five days. Breadth was also positive at the NASDAQ as the A/D line added 834 units while the number of new highs beat the new lows on four days. Finally, the percentage of stocks above their 50-day moving average jumped to 62.0% vs. 27.3% the previous week, while those above their 200-day moving average increased to 21.5% vs. 17.1%. 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 4/29/20 shows outflows of $7 billion. Currently, the Sentiment Index is Positive at +4, unchanged from the previous week.
Market Posture:Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 4/09/2020 (DJIA – 23719.37). 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): | 3 | 3 | Positive | ||||||
| Momentum Index: | -3 | -2 | Neutral | ||||||
| Sentiment Index: | 4 | 4 | Positive | ||||||
| Strength Index – DJIA (DIA): | 89.7 | 79.3 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 87.8 | 70.4 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 90.5 | 75.8 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 23723.69 | 23775.27 | -0.2% | ||||||
| S&P 500 Index: | , | 2830.71 | 2836.74 | -0.2% | |||||
| NASDAQ Composite Index: | 8604.95 | 8634.52 | -0.3% | ||||||
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 early 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: | 05/01/20 | 2830.71 | S&P 500: | 05/01/20 | 2830.71 | ||
| S&P 500 Points Gain/Loss: | 344.97 | S&P 500 Points Gain/Loss: | 239.61 | ||||
| S&P 500 % Gain/Loss: | 13.9% | S&P 500 % Gain/Loss: | 9.2% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $6,265 | Optionomics Covered Call $ P/L: | $28,136 | ||||
| Optionomics Traders % P/L: | 31.3% | Optionomics Covered Call % P/L: | 28.1% | ||||
| Last Week’s Traders % P/L: | 3.2% | 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: | 05/01/20 | 2830.71 | S&P 500: | 05/01/20 | 2830.71 | ||
| S&P 500 Points Gain/Loss: | -42.16 | S&P 500 Points Gain/Loss: | -76.70 | ||||
| S&P 500 % Gain/Loss: | -1.5% | S&P 500 % Gain/Loss: | -2.6% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $8,390 | Optionomics Billionaire Trade $ P/L: | $4,940 | ||||
| Optionomics Put-Call Hedge % P/L: | 8.4% | Optionomics Billionaire Trade % P/L: | 227.3% | ||||
| Last Week’s Put-Call Hedge % P/L: | 0.4% | Last Week’s Billionaire Trade % P/L: | 12.5% | ||||
The Market Edge ‘Market Posture’, which has been Bullish since the week ending 0913/2019 (DJIA 27219.52) remains Bullish at this time. For a detailed look at the technical indicators and studies that make up the market timing models, go to www.marketedge.com.
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