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Thursday, May 17, 2018

Overall Market Meter Changes from 'Neutral' to 'Slightly Bearish'

Today, the Covered Calls Advisor recalculated the current values for each of the seven factors used to determine the "Overall Market Meter" rating.  The result is that the Covered Calls Advisor's current market viewpoint changes from Neutral to Slightly Bearish.  A graphical representation of the "Overall Market Meter" is shown in the right sidebar on this page.    

The seven factors used are categorized as macroeconomic, momentum, value, and growth metrics as as follows:
- macroeconomic (the first two indicators in the chart below),
- momentum (next two indicators in the chart),
- value (next two indicators), and
- growth (the last indicator).
Note: The rating for each of these factors is not subjective.  Each factor is calculated using objective, quantifiable measures.

The current Market Meter average of 3.00 (see blue line at the bottom of the chart above) is in the Slightly Bearish range (Note: this Slightly Bearish range is from 2.35 to 3.09).  As shown in the right sidebar, the Covered Calls investing strategy corresponding to this overall Slightly Bearish sentiment is to "on-average sell 1% in-the-money Covered Calls for the next options expiration month".

The Macroeconomic factors are Bullish, the Momentum factors are Neutral, the Value factors are Very Bearish, and the Growth factor is Slightly Bullish.  The two Value indicators are especially noteworthy and concerning:
  • The current P/E ratio for the S&P 500 (based on the average of the actual 'Operating' and 'As Reported' earnings for the past year) is high at 22.0.  This is higher than the expected current P/E ratio of 18.6 (based on the current 2.5% CPI-U inflation rate for the past year).  The market would have to decline by 15.5% from its current level to reach a current expected average P/E ratio of 18.6.  
  • As the chart below clearly demonstrates, the Wilshire 5000 to GDP (aka Buffett Indicator) is especially alarming since it is now at its very highest level since 1970.    

The current very high market valuations explains why the Covered Calls Advisor Portfolio is now establishing only conservative in-the-money positions.

Finally, in February last year, the Covered Calls Advisor posted an article about the 'Emotional Roller Coaster of Investing' (Link to Article).  A Covered Calls Advisor post on December 13, 2017 took a position that we were in the 'Exhiliration' stage and that passing the proposed Tax Reform Bill might be the final step that would transition investors further into the 'Euphoria' stage. Furthermore, passing such a bill into law might result in yet another short-term all-time high in the stock market.  This is precisely what occurred -- the bill was passed, signed into law on December 22, 2017 and the Wilshire 5000 hit its all-time high of 29,760.59 on January 26, 2018.

But when it comes to investing, the Covered Calls Advisor now advises 'extreme caution' since, as the 'Emotional Roller Coaster of Investing' graph shows, 'Euphoria' is subsequently often followed by 'Unease' which is accompanied by additional declines in both investors' sentiment and stock market prices. 

This concern is also confirmed today by the Covered Calls Advisor's Overall Market Meter rating change from 'Neutral' to 'Slightly Bearish' .  The quotation shown in the 'Investing Words of Wisdom' section in the right sidebar of this blog by legendary investor and humanitarian John Templeton is very appropriate at this time in the market cycle:
  • "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." -- John Templeton

To share your comments or questions regarding this post (or the details related to any of the seven factors used in this Overall Market Meter model), 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. Thank you for your analysis! Love your work.