Thursday, May 19, 2011

Overall Market Meter Rating Remains "Slightly Bullish"

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. These nine factors can be categorized into macroeconomic (the first 3 indicators in the chart below), momentum (next 2 indicators in the chart), value (next 3 indicators), and growth (the last indicator). 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 4.11 is slightly lower than the 4.22 of last month, but nevertheless 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 next options expiration month of June 2011. Of the nine factors used, six remained unchanged from last month. The three indicators that changed were:
(1) Leading Economic Index -- from Very Bullish to Bullish; and
(2) Business Cycle and Unemployment Claims -- from Slightly Bearish to Neutral; and
(3) Interest Rates -- from Bullish to Slightly Bullish

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 May 2011 options expiration this week, newly established positions for June 2011 expiration will be established in accordance with this guideline.

In the field of behavioral finance, there is substantial academic research on cognitive biases. As investors, our emotional feelings about the current state of the stock market tends to fluctuate daily with the ups and downs of the market and also with the bullish and bearish investing-related information we read. A prior blog post describing my investing process states: "The greatest benefit of a well-defined, detailed investing process is that it enables us to be objective in our decision-making and to therefore counteract the negative impact that often occurs if we allow our emotions to influence our decisions. I am convinced that emotionally-driven decisions are the primary culprit that causes investors to often buy high (often accompanied by greed) and sell low (often accompanied by fear), the exact opposite of what they had intended to do." So, the Covered Calls Advisor attempts to replace emotional decision-making with objective decision-making wherevever possible. The 9-factor Overall Market Meter accomplishes this very nicely. Plug in the current numbers for each factor and the current resulting Overall Market Meter rating is automatically calculated. The specific factors that make up the model are occasionally updated (tweaked if you will) as new and better forecasting information is obtained. The Overall Market Meter model itself is, of course, not perfect. But generally speaking, I am pleased with it, and I love the fact that it removes the emotional roller coaster effect that each of us investors are prone to be adversely affected by.

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,