Monday, May 12, 2008

Market Meter Changes to Slightly Bearish

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 Neutral rating to a current rating of Slightly Bearish.

The current readings for the six metrics are:
1. U.S. Earnings and Bond Yield Spread:
4.77%-3.77%=+1.00% is Neutral.
2. Rest-of-World Earnings and Bond Yield Spread:
7.502%-3.99%=+3.51% is Very Bullish.
3. Real Earnings Growth:
(+0.5% Erngs Growth - 2.5% Inflation)=-2.0% is Bearish.
4. Current Vs. Expected P/E Ratios:
(18.6-20.98)/20.98 = -3.9% is Slightly Bearish.
5. Investor Sentiment (Price Momentum):
a. Longer-Term (Price Change vs. 9 months ago for Russell 3000):
(80.42-83.67)/83.67=-3.9% is Slightly Bearish.
b. Shorter-Term (using NYSE & NASDAQ Avg. 30-Day Advance/Decline Oscillators):
Slightly Bearish.
The average of the longer-term and the shorter term momentum indicators provides the result for this metric. Thus, since both metrics are 'slightly bearish', the overall Investor Sentiment rating is also now Slightly Bearish.
6. Covered Calls Advisor's Gut Feeling: Slightly Bearish

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

By 'slightly in-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% and 2.0% above the options strike price.

The six factors combined to result in a Slightly Bearish overall market view at this time. The very bullish reading from the high earnings-to-bond yield spreads in the rest-of-world(i.e. other than U.S.) are offset by the neutral to bearish ratings for each of the five other metrics used to determine the overall Market Meter rating.

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