It almost gets old talking about it - almost. The week before the July 19th beginning of the market correction, I stated in this blog that it was about time for a major correction and that in fact a correction would be desirable and healthy. So when the sell-off began, I was not concerned. That’s what markets DO. When a market, or stock for that matter, goes too far up without a correction, I get very antsy. I want to see the steam blown off. And sooner or later, it always happens. Through August and September, I waded through dozens of articles in magazines and online speculating about whether the bull market was over and a new secular bear market had begun.

The Dow crossed the 14,100 mark yesterday to new highs and settled to close to 14,087. Can everyone breathe a sigh of relief now? Gosh, just a few short weeks ago the Dow was at 12,500. It’s easy to crow when you’ve read the market right, but it also illustrates the adage (spelled out best of all by Larry McMillan) that in order to profit, we have to predict something. We all of necessity form an outlook about the market and specific stocks. We are only human and that is all we can do, but traders and investors must do it in order to function. And when we form an outlook we should stick to it, unless the facts informing our views change.

Where the market will be tomorrow, I don’t know. Or next week. But larger movements in markets are usually predictable to a degree, barring the inexplicable event like 9-11. There are no guarantees, of course, and it is just possible that a new bear market had crept up on us. But while that was possible, I stuck by my guns, not out of stubborness (death to investors and traders) but simply because the facts underlying my market assessment had not changed. Every one of my blog articles stated unequivocally that 1) the market was only correcting, but that the correction would be a big one, because a huge asset/credit bubble is ending, 2) the market would rebound to new highs [done], and 3) that the bull market would have legs for a while longer. I still stick by those sentiments.

Until consumer spending - a huge component of the US economy and thus corporate earnings - falls enough to start degrading earnings, the market should prosper. But the housing and other woes will start to tell on the economy, so sometime next year, perhaps in the spring or summer, I expect this bull to fall from exhaustion.

My point isn’t that I was right, though. It is that I formed an outlook and acted upon it. Had the facts changed, I would have changed my opinion. The wrong thing, though, would’ve been to panic from reading the many articles stating that a bear market had begun and to get out of equities.

But enough beating of my masculine chest… what now?

COVERED CALLS:
As I have also stated many times, now is the time for covered call writers to focus on the large-cap stocks. The internationals are best, since their global cash flow tends to even out local quirks. I am not alone in this. John Mauldin and many others hold the same opinion. As a bull market gets long in the tooth, there is a flight to quality (large-caps) that causes the blue chips to outperform the overall market. The smaller and mid-size stocks will not - as an asset class - perform as well as, much less outperform, the large caps from here on out. Market managers increasingly are rotating out of mid-caps into large-caps.

This is where covered call writers should be. For CallWriter members, look first to our S&P 100, Nasdaq 100 (the large-cap technology sector is doing quite well), and S&P 500 lists. If you are not a CallWriter member (huh?!), then stick to those indicies, however you find trades.

Let’s make some money!

This entry was posted on Tuesday, October 2nd, 2007 at 4:18 pm and is filed under Covered Calls, Markets/Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.