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Thursday, December 13, 2007

Market Meter Changes to Slightly Bullish

The Covered Calls Advisor conducts weekly reviews of the six key metrics used to determine its U.S. Market Meter Indicator. Today the indicator has changed from its prior Bullish rating to a current rating of Slightly Bullish.

The current readings for the six metrics are:
1. U.S. Earnings and Bond Yield Spread:
5.299%-4.09%=+1.21% is Slightly Bullish.
2. Rest-of-World Earnings and Bond Yield Spread:
6.115%-3.84%=+2.28% is Bullish.
3. Real Earnings Growth:
(1.0%-2.0%)=-1.0% is Slightly Bearish.
4. Current Vs. Expected P/E Ratios:
(18.6-18.87)/18.87=-1.4% is Neutral.
5. Investor Sentiment (Price Momentum):
a. Longer-Term (for Russell 3000):
(86.02-81.66)/81.66=+5.3% is Slightly Bullish.
b. Shorter-Term (using NYSE & NASDAQ Avg. 30-Day Advance/Decline Oscillators):
(Bullish + Neutral)/2 = Slightly Bullish
Since both the shorter-term and longer-term indicators are Slightly Bullish, then this overall Investor Sentiment rating is also Slightly Bullish.
6. Covered Calls Advisor's Gut Feeling: Neutral

The composite overall average outlook for the six indicators above is SLIGHTLY BULLISH, which is now reflected on the 'U.S. Market Meter' Indicator at the top of the right-side column of this blog. The meter also states the recommended investing strategy for this assessment: "The Covered Calls Advisor says: The Current Overall Stock Market Outlook is: SLIGHTLY BULLISH. The Corresponding Investing Strategy is: SELL SLIGHTLY OUT-OF-THE-MONEY COVERED CALLS."

For further insights into the definitions of each of the six components of the overall market meter, refer to the following two prior articles:
Link to 'Developing an Overall Market Outlook'
Link to 'Changes in Overall Market Outlook'

By 'slightly out-of-the-money', this advisor means that the covered call positions in a portfolio of near-month covered calls should now be established on-average with the stock price between 0.5% below and 1.5% below the options strike price.

A primary macroeconomic factor that will determine the short-term performance of the overall market is whether a recession will be avoided and the desired soft-landing achieved. Historic studies have repeatedly demonstrated that the stock market is bullish during the first six months after an initial Fed rate cut if a recession is, in fact, avoided. This advisor believes that an earnings recession will occur (defined as 2 consecutive quarters of negative corporate quarterly earnings growth), but that a recession based on GDP (two consecutive quarters of negative GDP growth) will be narrowly avoided. This descriptive analysis would tend to confirm the 'Slightly Bullish' overall rating result above.

In addition, it is noted that we are currently in a bull market that began on 10/9/02 and in which we have to date had a 91.4% increase as measured by the S&P 500. (Note: A bull market is defined as a rally exceeding +20% after a period of a 20+% decline).

Prior to this one, there have been five bull markets since 1970. This advisor analyzed the U.S. Earnings Yield to Bond Yield Spread at the end of each of these bull markets and discovered that these bull markets did not end until the U.S. Earnings Yield was more than 1% lower than the 10-Yr Treasury Bond Yield. In fact, the actual yield differences at the end of these five bull markets were -1.29%, -2.06%, -4.27%, -3.24%, and -1.39%. In comparison, as shown in #1 above, the current U.S. yield spread is +1.21%. In this advisor's opinion, this provides further support for the notion that the end of the current bull market is not imminent.

Regards and Godspeed

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