The Rally Rolls On
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Global equities soared to start the week after biotech Moderna (MRNA) announced positive results for a vaccine against the coronavirus. Also giving stocks a boost were comments from Fed Chair Jerome Powell that the Federal Reserve was “prepared to do everything we can, as long as we need to”, to support the economy. The DJIA jumped 911.95 points (+3.85%) to 24597.37, its biggest one-day point gain since a 1627.46-point (+7.7%) surge on 4/6/20. The rally struggled from there however, as the major averages trade in a narrow range the remainder of the week as investors assessed a flare-up in relations between the US and China after Congress passed an oversight bill related to business practices of Chinese tech company Huawei and potential security issues in Hong Kong. Earnings were mostly better than expected but investors sold the news and shares of Walmart (WMT), Home Depot (HD) and Target (TGT) traded lower after beating estimates but offering muted guidance. Big cap technology names continued to outperform with Facebook (FB), Amazon.com (AMZN) and NVIDIA (NVDA) hitting new all-time highs. That kept the DJIA and S&P 500 stuck in their trading range, but the NASDAQ’s positive momentum carried the tech heavy index to its highest mark since early February. The NASDAQ finished the week up +3.9% year-to-date and only -5.0% below its record high. Tensions between the US and China left the major averages mixed on Friday, but stocks finished the week with solid gains across the board.
For the period, the DJIA held on to early gains to close up for the second time in three weeks gaining 779.74 points (+3.3%) to 24465.16. The S&P 500 picked up 91.75 points (+3.2%) and finished at 2955.45. The NASDAQ continued to outperform adding 310.03 points (+3.4%) and finished at 9324.59, while the small cap Russell 2000 jumped 98.54 points (+7.8%) to close at 1355.53.
Market Outlook:The technical condition of the market improved last week and the DJIA turned in its best weekly percentage gain since the last week of March. That paled however to the gains seen in the small cap Russell 2000, up +7.8%, and a +9.1% surge in the DJ Transportation Index. Both indexes have lagged the recovery rally and the outperformance shows a rotation out of the ‘stay at home’ stocks and into ‘risk on’ equities. That broadening out of the market is a positive going forward as the much of the rally has been on the backs of a few big cap technology names. Another plus is that the NASDAQ looks to be in the process of closing a gap in its chart from 2/24/20 that targets 9542 when filled. The technical indicators for the different indexes remained in bullish ground with momentum, as measured by the 14-day RSI, positive. The sectors were mostly positive with Industrials (XLI), Energy (XLE) and Consumer Discretionary (XLY) taking the lead, while Healthcare (XLV) and Consumer Staples (XLP) lagged. Breadth was also supportive of the higher prices as the NYSE and NASDAQ Advance/Decline lines both showed strong accumulation. New 52-week highs however, continued to show only a small group of stocks hitting new highs.
Despite the improvement in the technical condition of the market there were signs that the rally off the March lows could be close to having run its course. The S&P 500 struggled again to close above its 200-day moving average (MA) and finished the period back in its trading range. In addition, the DJIA, DJ Transportation Index and Russell 2000 all ran into resistance and failed to clear the intraday highs from 4/29/20. Bearish investors are keeping an eye on these levels and they could represent the ‘line in the sand’ if the market’s run ends up being a rally in a bear market. However, on a positive note, the lack of negative divergence in breadth and the technical indicators doesn’t seem to be hinting that the market is due to selloff yet.
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 over 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 +2, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 3950 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also positive at the NASDAQ as the A/D line gained 3077 units while the number of new highs beat the new lows on each day. Finally, the percentage of stocks above their 50-day moving average jumped to 81.1% vs. 56.4% the previous week, while those above their 200-day moving average rose to 26.8% vs. 21.0%. 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 5/20/20 shows outflows of $4.9 billion. Currently, the Sentiment Index is Neutral at +2, down 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: | 2 | 1 | Neutral | ||||||||||
| Sentiment Index: | 2 | 4 | Neutral | ||||||||||
| Strength Index – DJIA (DIA): | 82.8 | 82.8 | Positive | ||||||||||
| Strength Index – NASDAQ 100 (QQQ): | 89.8 | 91.8 | Positive | ||||||||||
| Strength Index – S&P 100 (OEX): | 90.4 | 92.6 | Positive | ||||||||||
| Dow Jones Industrial Average (DJIA): | 24465.16 | 23685.42 | 3.3% | ||||||||||
| S&P 500 Index: | , | 2955.45 | 2863.70 | 3.2% | |||||||||
| NASDAQ Composite Index: | 9324.59 | 9014.56 | 3.4% | ||||||||||
| **Connotation is Positive or Negative Divergence from the DJIA | |||||||||||||
Ask Mr. Seifert
Is it possible to sell a credit spread that can have less risk than reward?
Answer: Yes, it is possible to sell a credit spread that has less risk than reward. The trade is called a 60/40 an it is an aggressive directional spread. Here is how it works. Normally when we sell a credit spread, we sell the ATM strike and buy a strike that is further out of the money. If you use a 60/40, we sell a spread that is slightly in the money. We are not taking a neutral position. We are trying to predict the direction that price will move. So instead of selling a 5.00 wide spread for $220 and assuming a $280 risk we sell the spread for $280 and assume a $220 risk. We never risk more than the difference between the strikes minus the premium we collected on the spread. The difference is in the 60/40 spread if the price doesn’t move in our favor, we will not collect the entire $280. We will collect a portion of the spread as a profit. The 60/40 is a spread that many professional traders use when they are confident that the price will move in their favor.
‘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: | 05/22/20 | 2955.45 | S&P 500: | 05/22/20 | 2955.45 | ||
| S&P 500 Points Gain/Loss: | 469.71 | S&P 500 Points Gain/Loss: | 364.35 | ||||
| S&P 500 % Gain/Loss: | 18.9% | S&P 500 % Gain/Loss: | 14.1% | ||||
| Risk Capital: | $20,000 | Risk Capital: | $100,000 | ||||
| Optionomics Traders $ P/L: | $4,483 | Optionomics Covered Call $ P/L: | $30,001 | ||||
| Optionomics Traders % P/L: | 22.4% | Optionomics Covered Call % P/L: | 30.0% | ||||
| Last Week’s Traders % P/L: | -6.1% | Last Week’s Covered Calls % P/L: | 1.3% | ||||
| 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: | 05/22/20 | 2955.45 | S&P 500: | 05/22/20 | 2955.45 | ||
| S&P 500 Points Gain/Loss: | 82.58 | S&P 500 Points Gain/Loss: | 48.04 | ||||
| S&P 500 % Gain/Loss: | 2.9% | S&P 500 % Gain/Loss: | 1.7% | ||||
| Risk Capital: | $100,000 | Risk Capital: | $50,000 | ||||
| Optionomics Put-Call Hedge $ P/L: | $10,573 | Optionomics Billionaire Trade $ P/L: | $5,921 | ||||
| Optionomics Put-Call Hedge % P/L: | 10.6% | Optionomics Billionaire Trade % P/L: | 284.2% | ||||
| Last Week’s Put-Call Hedge % P/L: | 2.9% | Last Week’s Billionaire Trade % P/L: | 44.2% | ||||
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