Apparently, the global financial system will emerge more or less intact from the subprime crisis. Credit spreads, like the TED Spread, have normalized as the market has accepted the fact that the US government will not allow the country’s largest financial institutions to fail.

Beyond that, the government has also made it clear there will be no fire sale of bank assets, no significant dilution to their balance sheets. And with capital ratios ramping up to “safe” levels, many banks are eager to repay those government bailout loans.

Obviously, this comes as a major relief to Canadian banks, most of which had considerable exposure to “troubled” US assets. And all, to one extent or another, were vulnerable to a US meltdown. Canadian financial sector stocks have rallied strongly since their March lows in tandem with the broader market advance.

The question is whether the advance will stall as the market enters a resistance zone. It is not likely we will set new highs without some real signs of growth. A slowing of the downward trend will no longer be enough to spur markets higher.

If you believe as I do, that a short-term retracement in the Canadian financials is likely – albeit temporary – then covered call writing is an ideal strategy. Table 1 looks at some potential covered calls on the Canadian banks.

Table 1 - Covered Call Writes

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