- 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).
The current Market Meter average of 1.43 (see blue line at the bottom of the chart above) is in the Bearish range (Note: the Bearish range is from 0.75 to 1.50). Although it remains in the Bearish range, a net increase of only 1 point in only 1 of the 7 categories would be enough to improve the Overall Market Meter Rating from Bearish to Slightly Bearish (albeit at the lower end of Slightly Bearish).
This 1.43 total is identical to the prior analysis done 3 months ago, but there were four changes (two positive and two negative) to individual factors:
- Bank Lending declined from Neutral to Slightly Bearish,
- High Yield Credit Spread-to-Unemployment Rate improved from Slightly Bearish to Neutral
- Interest Rates declined from Slightly Bearish to Bearish, and
- Total Market Index-to-GDP improved from Very Bearish to Bearish
So what is our current Covered Calls investing strategy? Based on the Covered Calls Advisor's "Bearish" Overall Market Meter (see right sidebar), the corresponding strategy is to "on-average sell between 4% and 7% in-the-money Covered Calls for options
expiration dates during the next month".
I agree with the 'Bearish' Overall Market Meter reading. Consequently, I plan to continue my current cautious strategy of establishing moderately in-the-money Covered Calls positions. It is generally agreed that The Federal Reserve's policy of Quantitative Easing (i.e. QE) during the most recent years provided a consistent tailwind to the stock market. Since the Fed has now reversed policies to: (1) regular increases in the Federal Funds rate to try to obtain control of inflation, but which is beginning to show signs of a significant deceleration in corporate earnings growth rates compared with their growth rates the past two years; and (2) Quantitative Tightening which will likely have the effect of being a headwind (the opposite effect that the QE tailwind was) for the stock market. In addition, the stock market's current valuation remains historically high on several metrics, including the two used in my Overall Market Meter (namely the Total Market Cap-to-GDP ratio and the S&P 500 Trailing-Twelve-Months P/E ratio) which provides an added headwind to the overall market.
Note: If you have not recently read the three linked articles below in this paragraph, please consider reading them carefully. I agree with Ben Graham and with the content of this article: link -- that it is impossible to successfully time the market on a consistent basis. But I cannot seem to totally ignore my need to have an opinion on its most likely upcoming direction. As Covered Calls investors, we need to select a strike price for every position we establish. Some Covered Calls investors avoid this important strike price selection decision entirely by always picking the same strike price every time (for example, the closest to at-the-money strike price, or one strike out-of-the-money). But I've never been able to do that. I prefer a more active decision-making approach; so I select strike prices based on my Overall Market Meter sentiment indicator -- at-the-money strike prices if the Overall Market Meter is Neutral, out-of-the-money if Bullish, and in-the-money if Bearish. Sometimes my Market Meter is right and sometimes its wrong, but over the years it has helped me in three primary ways: (1) it has helped me read more and thus learn more about the myriad factors that influence the overall stock market and the individual companies that comprise it; (2) it has given me a slight return-on-investment edge compared with always using the same strike price [and we all need to seek and find our investing edges: (See Link)]; and (3) it has contributed to my commitment to maintaining a disciplined investing process -- and with a "disciplined investing process", we are following Warren Buffett's advice to "take the emotion out of investing and simply stick with good businesses" (read this prior article from my blog: (link).
Regards and Godspeed to All,
Jeff Partlow (Covered Calls Advisor)
partlow@cox.net
