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Wednesday, September 15, 2010

Overall Market Meter Rating Remains "Slightly Bullish"

Each month during expiration week, the Covered Calls Advisor re-calculates each of the current values for the nine factors used to determine the "Overall Market Meter" rating. As shown in the chart below, the new Overall Market Meter Average rating (blue bar at the bottom of the chart) remains unchanged at "Slightly Bullish":

The current Market Meter Average of 4.22 is greater than the 3.89 of last month, but as such remains at Slightly Bullish (Note: the range for Slightly Bullish is from 3.5 to 4.5) for establishing covered calls investing positions for the upcoming options expiration month of October 2010. Of the nine factors used, six remained unchanged from last month and three changed. The three that changed were:
- Baltic Dry Index improved from Neutral to Bullish
- Price Trend improved from Neutral to Bullish
- P/E Ratios deteriorated from Slightly Bullish to Neutral

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Slightly Bullish sentiment is to "on-average sell 2% out-of-the-money covered calls for the nearest expiration month." So with the September 2010 options expiration this week, new positions for Oct2010 expiration will be established in accordance with this guideline.

The Slightly Bullish sentiment as described above is also consistent with the Covered Calls Advisor's perception of where we are on the "Investor's Sentiment Cycle" shown here on the left. This is a very interesting and useful chart because it recognizes both the cyclical and emotional nature of the stock market. Where are we located on this chart now? To this advisor, the credit crisis induced dramatic market decline in 2008 and early 2009 hit bottom in March 2009 ("bear market ends" trough on the chart below corresponding to emotional "despair"). It seems to this advisor that we have progressed to the "hope" stage along this cyclical roller coaster curve and that we might move upward to "relief" over the next several months if the dreaded (and highly unlikely in this advisor's opinion) double-dip recession is avoided. Being anywhere along the green line on the chart signifies periods of relative bullishness for the stock market, while the red line denotes relative bearishness. Here is an interesting survey conducted of 100 investing professionals who explained where they think we are now on the curve: link. So, if what I believe to be true is correct and we are now in the "hope" phase, then this chart would tend to confirm the current "Overall Market Meter" investing posture of "Slightly Bullish".

For a more detailed explanation of each of the Covered Calls Advisor's nine indicators, please refer to this prior blog post on that topic -- link.

Your comments or questions regarding this post are welcomed. Please click on the "comments" link below or email me at the address shown in the upper-right sidebar.

Regards and Godspeed,

1 comment:

  1. Hi Jeff!

    Actually, this is in response to your previous post about the 6 areas of covered call writing.

    Do you find that the comparison between the average buy-and-hold investor to the CC investor over 10 yr period can actually have a greater difference?

    I am also a CC investor, but I have spent a great deal learning technical analysis/candlesticks etc, and I've found that just from employing such strategies have actually increased ROI abilities on the covered call, because rather than focusing on selling month-to-month calls, you start focusing on market sentiments - ie selling teh covered call near resistance, buying near support (or just leaving it to expire).

    But I would definitely see why those stats can be misconstrued because if you were to sell the covered at the beginning of a bull run (thus having the chance of your covered call being in the-money, you could potentially make less money than a buy-and-hold strategist (who doesn't have that mistake of having that ceiling that covered calls cause).

    Wow, I don't know if you understood that, as the comment is pretty in-depth. But I would like to hear your thoughts.