- 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 1.57 (see blue line at the bottom of
the chart above) is in the Slightly Bearish range (Note: the Slightly Bearish range is from 1.50 to 2.50).
This 1.57 total is slightly higher than the 1.43 of the prior analysis done 3 months ago, but there were three changes (two factors improved, one declined, and 4 remained unchanged) to individual factors as follows:
- Price Trend improved one level from Very Bearish to Bearish,
- P/E Ratio improved one level from Very Bearish to Bearish, and
- Future Earnings Growth declined one level from Neutral to Slightly Bearish
So what is our current Covered Calls investing strategy? Based on the Covered Calls Advisor's "Slightly Bearish" Overall Market Meter (see right sidebar on this blog's homepage here), the corresponding strategy is to "on-average establish Covered Call positions that are between 2% and 5% in-the-money and with short-term (i.e. one month or less) option expiration dates".
The Federal Reserve's policy of Quantitative Easing (i.e. QE) during recent years provided a consistent tailwind to the stock market's performance. Since the Fed has now reversed policies to: (1) regular increases in the Federal Funds rate to try to eventually return the rate of inflation back to their 2% target, which is now beginning to affect, as expected, 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 to "don't fight the Fed" and the current "Slightly Bearish" Overall Market Meter sentiment, a third fundamental factor of concern is the current nine consecutive monthly declines in the U.S. Leading Economic Indicators (LEI) Index. In September 2022, LEI flashed its first recession "warning signal" which normally precedes the onset of a recession by an average of roughly 6 months. So, these 3 fundamental stock market headwinds most likely portend a continuing difficult investing environment during the first half of 2023. So going forward, I plan to comply with my "Slightly Bearish" guideline to "on-average establish Covered Call positions that are between 2% and 5% in-the-money and with short-term (i.e. one month or less) options expiration dates".
Finally, I normally update my Overall Market Meter quarterly, but my current sense is that every two months would be preferable this year, so I am marking my calendar to conduct the next Overall Market Meter update in early March 2023.
Wishing a Happy, Healthy, and Prosperous New Year to All of You,
Jeff Partlow (Covered Calls Advisor)
partlow@cox.net
