I'm going to start blogging my trading ideas with the thought that maybe it might benefit someone else. Maybe other could contribute their ideas and improve upon mine. Generally I'm looking to create an income generating portfolio of dividend paying equities which I'll exercise buy-write (covered call) options on. This is especially beneficial if done in an IRA or 401K type account so that the option and dividend revenue generated grows tax deferred. The candidates are generally stocks that have experienced a correction over the past year or so and have found a clearly defined level of support. Stocks of this nature coincide with the type of investing I'm comfortable with which are quality dividend paying stocks that have temporarily been out of favor. The level of support helps in a couple of ways. First you are not trying to catch a falling knife (thinking you are buying cheap only to see it go much cheaper). Second, if the stock price decisively breaks that level of support it helps us define our stop loss level and when to exit the position. My first idea is Quality Systems Inc (QSII). Fundamentally it is paying a 4% yield with a sustainable payout ratio of 62%. It currently has a P/E of 15 which has consistently been the low P/E level for this stock over the past decade. It also has a return on equity of 23% and has grown its revenue and cash flow per share for the past 9 consecutive years. Technically speaking we can use http://www.freestockcharts.com and pull up a weekly chart. It's showing that the stock is currently trading for $17.39 with strong support around the $17 level and a positive MACD divergence.

Now let's see how we can conservatively generate even more income from this dividend payer. Using Tradestation's option station search we find that the upcoming February 16th 2013 $17.50 strike is selling for $1.05 which is 41 days from today. That brings our break even price down to $16.34. If the option is exercised it will return 7.1% and if it is not exercised it will yield a 6.4% return. That equates to an annual 62.3% and 56.4% return respectively (if in theory if we could do this every 41 days for a year). We will set a stop loss at the $15 level.

The sentiment in the overall market is looking a little bit toppy

American Association of Individual Investors - % Bull Minus % Bears

American Association of Individual Investors - % of Bearish Investors

Weekly Volatility Index

Silver sentiment

Here is a chart prepared by Sentimentrader.com indicating that the public's sentiment for silver is at a multi year low:

Gold sentiment part II

Here is chart from Guy Lerner over at the www.thetechnicaltake.com (link to article is pasted onto the chart). It plots the market vane sentiment (i.e. percentage of bulls, bottom of chart) against the price plot of Gold. Since Guy posted this chart a few days ago the sentiment reading recently hit 56%. Over the past 9 years or so this has indicated a short term price bottom in the long term bull market for gold. If you believe the bull market will continue this is a great entry point.

From a contrarian's point of view this is a good time to pick up some shares in the precious mining companies.

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