Tuesday, August 16, 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 each of the factors used to determine the "Overall Market Meter" rating. Prior to this month, there have been nine factors used in compiling the Overall Market Meter sentiment each month. Beginning this month, the Conference Board's Leading Economic Index has been removed. The Covered Calls Advisor's research on this indicator has concluded that it is not as useful as a macroeconomic stock market indicator as was originally believed. The remaining eight factors now used can be categorized into macroeconomic (the first two indicators in the chart below), momentum (next two indicators in the chart), value (next three indicators), and growth (the last indicator) factors.

The current Market Meter Average of 3.50 is below the 4.11 of last month. The 3.50 is exactly on the inflection point between Neutral (range of 2.5 to 3.5) and Slightly Bullish (range from 3.5 to 4.5). Since the most recent rating has been Slightly Bullish, this rating will be retained unless the Overall Market Meter average falls below 3.50, in which case the overall sentiment would change to Neutral. Of the eight factors used to determine the Overall Market Meter rating: (1) Three (Business Cycle and Unemployment Claims, P/E Ratios, and Future Earnings Growth) remain unchanged from the prior analysis last month; (2) Two factors improved from last month (Earnings-to-Bond Yield Spread went from Slightly Bullish to Bullish and Total Market Index Divided by GDP improved from Slightly Bearish to Neutral); and (3) Three factors declined (Bank Lending changed from Bullish to Slightly Bullish; Price Trend switched from Bullish to Bearish; and Interest Rates changed 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 August 2011 options expiration this week, newly established positions for September 2011 expiration will be established in accordance with this guideline.

Your comments or questions regarding this post (or the details related to any of the eight factors used in this model) are welcomed. Please click on the "comments" link below or email me at the address shown in the upper-right sidebar.

Regards and Godspeed,