Overall Market Meter Remains 'Neutral'

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 remains unchanged at Neutral.  A graphical representation of the "Overall Market Meter" is shown in the right sidebar on this page.    

The seven factors used can be categorized as:
- 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 3.14 (see blue line at the bottom of the chart above) is in the Neutral range (Note: the Neutral range is from 3.10 to 3.59).  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 next options expiration month".

The Macroeconomic and Momentum factors are Bullish, the Value factors are Very Bearish, and the Growth factor is Neutral.  Please take special notice that both Value indicators (P/E Ratios and also Total Market Index to GDP) are Very Bearish:

• 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 very high at 23.6.  This is higher than the expected current P/E ratio of 18.6 (based on the current 2.0% CPI-U inflation rate for the past year).  The market would have to decline by 21.2% from its current level to reach a current expected average P/E ratio of 18.6.  
• As the chart below clearly demonstrates, only once since 1970 has the Wilshire 5000 to GDP (aka Buffett Indicator) been at a higher level than it is currently.    
  
  

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

Finally, in February this year, the Covered Calls Advisor posted an article about the 'Emotional Roller Coaster of Investing' (Link to Article) which posited that we were in the 'Exhiliration' stage and furthermore that passing a Tax Reform bill might be the final step that would transition investors further into the 'Euphoria' stage. Such a bill could become law within the next month. That might result in yet another short-term all-time high in the stock market.  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 normally followed by declines in investors' sentiment which are accompanied by stock market declines.
Do you agree?  Disagree?  Why?

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,
Jeff