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Sunday, May 31, 2009

Market Meter Changes From Slightly Bullish to Neutral

The Covered Calls Advisor conducts monthly reviews of ten key metrics to determine its Overall Market Meter Indicator. Today the indicator has changed from its prior Slightly Bullish rating to a current rating of Neutral.

The indicator has been 'Slightly Bullish' since November 7th, 2008. During these past almost seven months, the overall stock market has been very volatile with both very bearish and most recently very bullish price movements. But overall, the Russell 3000 Index has increased by 1.6% during this period.

The current readings for each of the ten metrics used by the Covered Calls Advisor to determine the overall U.S. Market outlook are:

1. U.S. Earnings Yield and Bond Yield Spread:
4.68%-3.46%=+1.22% is Neutral.

2. Rest-of-World Earnings Yield and Bond Yield Spread:
5.84%-2.14%=+3.70% is Slightly Bullish.

3. Real Earnings Growth:
a. U.S. Actual Earnings Growth (Year-Over-Year) for Latest 2 Quarters: Very Bearish
b. U.S. Estimated GDP Growth: Year-Over-Year GDP Growth for Next 2 Qtrs
(+2.0% GDP Growth - 1.0% Inflation)= +1.0% which is Slightly Bearish.
The average of these two ratings is Bearish.

4. Current Vs. Expected P/E Ratios:
Current trailing 12-months P/E for S&P 500 is 21.4 and the expected P/E with trailing 12-mos. inflation at 2.3% is 18.6:
(18.6-21.4)/21.4 = -13.0% is Bearish.

5. Market Sentiment(Price Momentum):
a. Longer-Term (Price Change vs. 9 months ago for Russell 3000):
(53.81-73.88)/73.88=-27.2% is Very Bearish.
b. Shorter-Term (using NYSE & NASDAQ Avg. 30-Day Advance/Decline Oscillators):
Slightly Bearish.
c. Shorter-Term (Equity-Only Put/Call Ratio):
Average of Most Recent 21-Day Ratio and Last Two Day's Ratio is Bullish.

The average of the longer-term and the two shorter term sentiment indicators provides the result for this metric. Thus, since the first metric is 'very bearish', the second is 'bullish' and the third is 'bullish', the overall Market Sentiment rating averages as Slightly Bearish.

6. Covered Calls Advisor's Gut Feeling: Neutral
The strongly bullish move during the most recent three months places the current S&P 500 averages at slightly-above-the-mean for the expected trading range for 2009.

7. Inflation:
Latest 1-Year Trimmed Mean PCE is 2.30% which is Very Bullish.

8. Money Supply:
Latest 1-Year M2 Growth of 8.5% is Slightly Bearish.

9. Federal Government spending:
Above-average government spending is Bullish.

10. Overall Geopolitical Sentiment:
From a historical comparison basis, current worldwide geopolitical sentiment is Neutral.

The composite overall average outlook for the ten indicators above is NEUTRAL, which is now reflected on the 'Overall Market Meter' Indicator at the upper-right sidebar of this blog. The meter also states the recommended covered calls investing strategy that corresponds with this assessment: "The Covered Calls Advisor says: The Current Overall Stock Market Outlook is NEUTRAL. The Corresponding Investing Strategy is "SELL AT-THE-MONEY COVERED CALLS."

By 'at-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 1.0% below and 1.0% above the options strike price.


  1. I see that most of your metric's are relatively US focused. Considering your current heavy weighting toward international holdings, do you have to also create a "market sentiment" rating for China for example?

  2. Good point. I also use an International Value Rankings spreadsheet that helps me assess the relative value of major countries around the world. See
    I will soon do an updated blog post on this topic since:
    (1) I have improved the spreadsheet variables; and
    (2) the current #1 ranked country is China.
    Thanks for your comments,

  3. Jeff,

    I had a quick question for you about closing positions. Im currently running about 1% under my max profit for a number of my positions and I am hesitant to roll them up both due to a relatively small increase in premium to be gained and a fear of a pullback before expiration. Would you suggest closing out the positions, and beginning new ones in other stocks? Or maybe some other method?


  4. Hi Jake,
    That's a really good question -- and quite a dilemma. If you still like the companies that you currently own, then I would recommend you consider keeping them and rolling them up, especially if the stock price is currently 10% or more above the current strike price. If you would like my feedback on a specific stock, then email me privately at with the details and I will gladly give you some more specific ideas to consider.

  5. Ha Jake, I'm in the same boat as u!! I'm also in the same position as you. I ended up closing some of the positions out and letting a couple of the run their course.

    Currently it feels harder and harder to establish new covered calls positions as the market is rallying so heavily.

  6. Jeff - I like your meter. Jeff W

  7. Anonymous,

    I would agree that it is becoming much more difficult in the last month to establish quality covered call positions. To Jeff's point in another comment area about being a value investor vs. groenkesque technical analysis covered call investing, this is the point where value investing in my opinion becomes important. It will become increasingly more important to choose stocks you actually would want to own for a longer period, just in case things dont go as planned.