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.