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Wednesday, December 15, 2010

Change from Slightly Bullish to Neutral

Each month during options 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. Today the indicator has changed from its prior Slightly Bullish rating to a current rating of Neutral.

The indicator has been Slightly Bullish for just over a year -- since Dec. 6th, 2009. During these past twelve months, the overall stock market has been very volatile with alternating short-term bearish and bullish price swings. But overall, the benchmark Russell 3000 Index has been in a moderate uptrend with an increase of +16.9% during this period.

As shown in the chart below, the new Overall Market Meter average rating (blue bar at the bottom of the chart) is now Neutral:

The current Market Meter Average of 3.33 is lower than the 3.56 of last month, and as such changes from the Slightly Bullish range (between 3.5 and 4.5) to the Neutral range (2.5 to 3.5) for establishing covered calls investing positions for the next options expiration month of January 2011. Of the nine factors used, seven remained unchanged from last month. The two indicators that changed were:
(1) Earnings-to-Bond-Yield Spread -- from Bullish to Slightly Bullish; and
(2) P/E Ratios -- from Neutral to Slightly Bearish

As shown in the right sidebar, the covered calls investing strategy corresponding to this overall Neutral sentiment is to "on-average sell 1% out-of-the-money covered calls for the nearest expiration month." Thus, new positions for Jan2011 options expiration will be established in accordance with this guideline.

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. These nine factors can be categorized into macroeconomic (the first 3 indicators in the chart above), momentum (next 2 indicators in the chart), value (next 3 indicators), and growth (the last indicator).

The Covered Calls Advisor is currently tracking two additional factors: (1) The Conference Board's Leading Economic Index; and (2) Estimated Future Inflation -- three sub-factors being tracked here are the money multiplier, the velocity of money, and capacity utilization. A decision on whether or not to add these two factors into the Overall Market Meter rating system will be made within the next several months.

Your comments or questions/clarifications regarding this post are welcomed.
Please click on the "comments" link below. If you prefer to remain anonymous, email me at the address shown in the upper-right sidebar.

Regards and Godspeed,

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