Here’s my take on the economy and how it influences our covered call decisions: In a healthy economy, stocks are more likely to appreciate in value and we can then take a more aggressive posture with our investments. This means selling more O-T-M strikes and generating even higher investment returns. If we are experiencing economic woes as we did in 2008, we either must move our cash out of the market or take a more defensive posture by selling I-T-M strikes and perhaps not be fully invested.
In updating the economic situation, I have been summarizing the past week’s ecomonic news and providing graphs of the S&P 500, the CBOE Volatility Index and other Industrial charts. This site has commented frequently about the economic indicators and whether the reports were positive or negative. Many of these figures came from The Conference Board and I can just envision many of you thinking to yourselves (as I have): Whoa….way too much information, it’s giving me a headache! So, I did a little research in an effort to encapsulate and simplify some of these stats.
The Conference Board:
This a a not-for-profit, non-governmental organization for businesses that disseminates information about key economic variables. These business cycle indicators can be broken down into three categories:
1- Leading Indicators: These are economic factors that change before the economy starts to demonstrate a particular trend. These indicators are used to predict future behavior of our economy. Here are the 10 indicators in this group:
- vendor performance
- interest rate spread
- stock prices
- real money supply
- index of consumer expectations
- building permits
- manufacturers new orders for non-defensecapital goods
- average weekly manufacturing hours
- average weekly initial claims for unemployment insurance
- manufacturers new orders for consumer goods and materials
An increase in the Leading Economic Indicators Index (LEI) bodes well for the economy.
2- Coincident Indicators: These are economic factors that vary directly and simultaneously with the business cycle, thereby describing the current state of the economy. The four indicators in this group are:
- personal income
- manufacturing and trade sales
- industrial production
This index paints a picture of the current economic environment.
3- Lagging Indicators: These are economic factors that change after the economy has begun to follow a particular trend. Just like moving averages, they are used to cofirm long-term trends but cannot predict them. The seven components in this group are:
- average duration of unemployment
- commercial and industrial loans outstanding
- change in labor cost
- ratio of manufacturing and trade inventories to sales
- average prime rate charged by banks
- ratio of consumer credit to personal income
- change in CPI (consumer price index) for services
A continuing decline in these lagging indicators demonstrate a negative economic trend. For example, if the CPI (most important measure of inflation) was above expectations, it would have a negative impact on stocks and bonds.
Although it is not necessary to turn ourselves into sophisticated economists, I believe that it is prudent to be aware of what the statistics are telling us, so we can tailor our investment decsions accordingly. Here is a link to The Conference Board’s Website:
Stocks to consider:
I located 7 stocks that meet our system criteria, which can be added to my watchlist. Here are the aforementioned equities:
Let’s technically analyze the chart for DIN:
1- The short term ema is above the long term ema, a positive.
2- The price bars are at or above the 20-d ema, a positive.
3- MACD is positive and the histogram just had a positive center-line crossover, a positive.
4- Stochastics moved above the 20% and has not turned back, also a positive.
5- We have volume confirmation of these technical indicators.
Based on fundamental and technical parameters, this would be a stock that I would consider selling options on (after the upcoming ER) as long as the calculations were acceptable.
Thank you, Thank you, Thank you:
My publisher informed me that my last book, Exit Strategies for Covered Call Writing immediately broke into its top 10 list of sales. As of Thursday both my books were listed as 1 and 2 in sales under the category of “Covered Calls” on Amazon.com. I am deeply touched and humbled by your support.
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As I mentioned last week, I am hosting a seminar in California this weekend and that is why this week’s article was published earlier than usual. I anticipate catching up with my email responses during the course of the week.
My best to all,