Market Condition: cautious -> bullish

1. ChartAdvisor.com thinks the markets are uncertain now.  It may continue upward to eventually break out or go downward to breakdown the June lows.  It asks for patience and caution.
2. Schaefferesearch.com is, however, more bullish.  SP500 support 1295-1305.  Resistance: 1333-1340.  A higher VIX also favors bulls for now.
3. VIX: 19.53 at Friday’s close, remains at the higher end of the 16-20 range, a signal for bullishness.  “In the 2011 calendar year, a strategy of selling equities when the VIX approaches 15 and buying equities when the VIX advances above 20 has proven to be a rewarding timing approach.”(Schaeffersresearch.com)
4. Market moving factors:
   1. earnings report seasoning.
   2. US debt debate
   3. European fiscal problems (Italy now).  Don’t we all hate Europe by now?  Their problems seem endless.

My take on the above: cautious set up long exposure with hedging in place.  When choose stocks, follow these criteria that I set forth earlier.  For covered calls that will expire at the regular Aug cycle, you may want to sell calls out of money (due to the bullish forecast and very likely a post Aug 2 market rally).  If you are like me, interested in experimenting with new strategies, I am contemplating to try the following strategy: buy calls when bullish and buy puts when bearish.  In the past 6 – 9 months, I tried option spreads (almost always bull spreads), but I am abandoning option spreads now.  It is too risky.  I’ll try small amounts of call or put buying (not selling, the risk is too high) for fun.  I will choose those options with a longer term (1 -2 months to expire).  I will then close these options when the market conditions change, before expiration.  For example, with the current market condition as bullish, I am considering to buy calls of stocks or index ETF with at least 4 weeks before expiration.  When to sell? When VIX approaches towards 16 and when SP500 is closer to 1330-1340.  If you are long an option, try to sell them at least 1 week before expiration, as the time value will depreciate very drastically in the last week.  The bulk of my investment portfolio (>95%) is in covered call which is one of the safest and yet profitable investment strategies out there.

I personally also favor a bullish rating, although I expect further market volatility, esp. with the US debt debate.  I don’t expect the politicians are giving to give us an easy answer to the debt ceiling issue.  But the good news is Aug. 2 is coming soon and we’ll have an answer by then.  I anticipate that the US debt ceiling will be raised (US debt default is just too catastrophic for the politicians to handle and no one will win if that happens) with or without concurrent budget cuts and tax increases.  After Aug. 2, unless the European financial problems becomes major headlines again, we should see less volatility in and a smoother sail of the markets.

Happy trading.

rc