1- Check the stocks that ARE eligible and determine whether there are enough equities for our portfolio size that are well-diversified by industry segment. If there are, you’re good to go. If not, you can start to invest with these stocks and leave cash on the sidelines for the next entry point.
2- You will note that there are many stocks that report early in the cycle. Allow the ER to pass and re-check our system criteria. Once the post-ER dust settles and if the stocks are eligible, we can enter those positions. ***Some cycles last 5 weeks so entering in the second week or the start of the third should still generate favorable returns.
3- If the first two strategies fall short and you still need more “security-power” to write your calls, why not turn to exchange-traded funds (ETFs) for our covered call writing? These are mutual funds that behave like stocks and represent a “basket” of equities so there is instant diversification and earnings reports are no longer a concern. The BCI Corp. also produces a weekly 6-page report of top-performing ETFs suitable for covered call writing. Here is a partial sample of a recent report:
Premium members will find this in the “Resource/Download” section of the premium site.
All exchange-traded funds listed in the report have outperformed the S&P 500 (black) over the past three months as of that post. These would be CC candidates to consider if you couldn’t locate enough individual equities to populate your portfolio. These are also appropriate for more conservative investors and those with limited time to devote to this strategy. Although many of the stocks within these ETFs do report, the fact that we are dealing with such a large basket of securities, the ER issue becomes much less of a concern as they tend to counterbalance each other.
During the four earnings seasons, we must avoid selling calls on stocks that report in the current cycle, prior to those reports. In these instances, we look to candidates not reporting in the current cycle, wait for reports to pass and then enter into those positions and consider selling calls on the best-performing ETFs. Problem solved!
Despite decent signs of economic recovery in the US, concerns of Europe heading into recession and slowing economic growth in Asia has investors nervous. Here are this week’s key reports:
- The Fed announced that it will take no additional steps to ignite the economy as it cited “moderate economic growth”
- The Fed reiterated its pledge to keep its key interest rate near zero through mid-2013
- Retail sales rose by 0.2% in October, the weakest showing since June
- Retail sales stats for September and October were revised upward
- US industrial output declined in November, the first time since April, however, floods in Thailand caused shortages of parts for US automakers
- Low ratios of retail inventories due to nervous retailers may bode well for future production
- Year-0ver-year inflation rate is only slightly above the Fed target of 2%
For the week, the S&P 500 declined by 2.8% for a year-to-date return of (-) 1%.
While the VIX remains at a comfortable sub-30 level a 6-month chart of the S&P 500 shows it trading slightly below its 50-d simple moving average. You will note a volume spike on Friday which was related to Quadruple Witching Friday. The constant whipsaws that the market is experiencing due to global issues has rendered technical analysis challenging as left tail risk rears its ugly head:
IBD: Market in correction
BCI: Taking a cautious, defensive posture using low-beta stocks and ETFs with in-the-money strikes. This market is geared to turning bullish once the European issue is resolved favorably.
Happy holidays to one and all,
Alan ([email protected])