Bulls Take A Breather
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The rally off the March lows ran into some headwinds this week as the major averages turned in their biggest weekly loss since mid-March. Investors weighed the reopening of state economies against White House Health consultant Dr. Fauci’s warning that the US would face ‘needless suffering and death’ if states reopened too quickly. Comments from Fed Chair Jerome Powell on Wednesday that he saw an extended period of weakness in the economy, and cautious commentary from legendary investors David Tepper and Stanley Druckenmiller that the stock market may be the most overvalued since 2000, also sent equities reeling. The DJIA tumbled 1083.35-points (-4.5%) over the first few days of the week and sank another 458-points on Thursday before the index turned on a dime and surged +835-points off the session low. After bouncing off its 50-day moving average the Dow rallied to close with a gain of 377.28 points (+1.62%) as analysts projected that the lows were in for jobs numbers and more states announced reopening’s for the upcoming weekend. A combination of increased tensions between the US and China and a worse than expected falloff in April Retail Sales kept early pressure on the market again on Friday as semiconductors and big cap tech names were hit with some selling pressure. The President threatened to suspend chip sales to China’s Huawei, while China countered with investigation into Apple Co (AAPL), Qualcomm (QCOM) and Cisco Systems (CSCO) sending the stocks sharply lower. However, strength in biotech shares consumer stocks brought the different indexes back into the plus column to finish Friday, but it wasn’t enough to undo the damage done to the major averages earlier in the week.
For the period, the DJIA was unable to erase an early selloff and finished the week down 645.90 points (-2.7%) at 23685.42. The S&P 500 lost 66.10 points (-2.3%) and finished at 2863.70. The NASDAQ continued to outperform but slipped 106.76 points (-1.2%) and finished at 9014.56, while the small cap Russell 2000 tumbled 72.65 points (-5.5%) to close at 1256.99.
Market Outlook:The technical condition of the market deteriorated during the week and the DJIA turned its worst one-week loss since mid-March. The technical indicators finished the period mixed with the NASDAQ showing positive momentum based on the 14-day RSI, but the other indexes were neutral. MACD, which measures the short-term trend of the market, slipped into bearish ground for the Dow and DJ Transportation Index, but remained neutral for the NASDAQ, S&P 500 and Russell 2000. On a positive note, several of the major averages were able to find support at key moving average support levels during the week which could help the market nudge higher next week. The Dow bounced off its 50-day moving average (MA), the NASDAQ found support at its 100-day MA, while the Philadelphia Semiconductor Index held a test of its 200-day MA. On the flip side, the DJ Transportation Index, small cap Russell 2000 and Philadelphia Semiconductor Index (SOX) suffered the biggest losses this week, which is a real concern for the broader market. Technicians would like to see these indexes lead the market and weakness here is a red flag. The sectors were a mixed picture with Technology (XLK) and Healthcare (XLV) holding support at their respective 50-day MA, while Consumer Discretionary (XLY), Consumer Staples (XLP) and Communication Services (XLC) struggled around their 200-day MA. Industrials (XLI), Financials (XLF), Utilities (XLU) and REITs (XLRE) all remained below their 50-day MA. Except for Healthcare however, every other sector finished lower on the week. Breadth was also mixed as the NYSE and NASDAQ Advance/Decline lines tracked lower, but the NYSE and NASDAQ both saw new 52-week highs outdo new lows on three of the five days. Volume on the other hand increased on the down days. Volume has been decreasing during the rally off the lows showing negative divergence. Despite conflicting signals in the technical condition of the major averages we could see equities work their way higher next week, though remain range bound. That would have 2950 as resistance for the S&P 500 and 2770 as support.
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 Neutral at +1, 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 A, B and D are bullish, while Cycles C and E are Bearish. The CTI is projected to return to a negative count in the next week or two however, 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 +1, down five notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line dropped 4160 units while the number of new 52-week highs out did the new lows on three of the five days. Breadth was also mixed at the NASDAQ as the A/D line lost 3006 units while the number of new highs beat the new lows on three days. Finally, the percentage of stocks above their 50-day moving average fell to 56.4% vs. 62.0% the previous week, while those above their 200-day moving average eased to 21.0% vs. 21.9%. 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 5/13/20 shows outflows of $2.5 billion. Currently, the Sentiment Index is Positive at +4, up two 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 5/08/2020 (DJIA – 24331.32). 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: | 1 | 6 | Neutral | |||||||
| Sentiment Index: | 4 | 2 | Positive | |||||||
| Strength Index – DJIA (DIA): | 82.8 | 96.6 | Positive | |||||||
| Strength Index – NASDAQ 100 (QQQ): | 91.8 | 91.8 | Positive | |||||||
| Strength Index – S&P 100 (OEX): | 92.6 | 94.7 | Positive | |||||||
| Dow Jones Industrial Average (DJIA): | 23685.42 | 24331.32 | -2.7% | |||||||
| S&P 500 Index: | , | 2863.70 | 2929.80 | -2.3% | ||||||
| NASDAQ Composite Index: | 9014.56 | 9121.32 | -1.2% | |||||||
| **Connotation is Positive or Negative Divergence from the DJIA | ||||||||||
Ask Mr. Seifert
Question: You list the various Traders selections every week with the assumption that one spread for each position should be initiated. Since the maximum risk for the various strategies can be different, shouldn’t the number of spreads vary?
Answer: The win percentage for all of the ‘Traders’ strategies averages around 61%. The main difference between the strategies is the maximum dollar risk per spread. Blow Offs can have a maximum risk of let’s say $520 while a Bearish or Bullish Vertical Credit Spread may only have a maximum risk of only $130. The number of spreads that you position is up to you. Our published results are based on one spread per play. If you would like to balance things out, a good tactic would be to commit the same amount of risk capital per play. In the above example that would equate to one Blow Off trade ($520) and four Bearish Vertical Credit spreads ($520 = $130 x 4).
‘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: | 05/15/20 | 2863.70 | S&P 500: | 05/15/20 | 2863.70 | ||
| S&P 500 Points Gain/Loss: | 377.96 | S&P 500 Points Gain/Loss: | 272.60 | ||||
| S&P 500 % Gain/Loss: | 15.2% | S&P 500 % Gain/Loss: | 10.5% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $5,701 | Optionomics Covered Call $ P/L: | $28,672 | ||||
| Optionomics Traders % P/L: | 28.5% | Optionomics Covered Call % P/L: | 28.7% | ||||
| Last Week’s Traders % P/L: | 0.4% | Last Week’s Covered Calls % P/L: | -0.1% | ||||
| 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: | 05/15/20 | 2863.70 | S&P 500: | 05/15/20 | 2863.70 | ||
| S&P 500 Points Gain/Loss: | -9.17 | S&P 500 Points Gain/Loss: | -43.71 | ||||
| S&P 500 % Gain/Loss: | -0.3% | S&P 500 % Gain/Loss: | -1.5% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $7,689 | Optionomics Billionaire Trade $ P/L: | $5,000 | ||||
| Optionomics Put-Call Hedge % P/L: | 7.7% | Optionomics Billionaire Trade % P/L: | 240.0% | ||||
| Last Week’s Put-Call Hedge % P/L: | -3.5% | Last Week’s Billionaire Trade % P/L: | -4.1% | ||||
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