When times are tough, this simple investment strategy works exceptionally well.

Right now times are tough.

Stocks, as a whole, are overvalued. They could move lower or higher. They’re stuck in the middle. Jeremy Grantham, of Grantham Mayo & Van Otterloo, summed it up well in his latest quarterly letter, “The global equity markets taken together are moderately overpriced, and the U.S. part is now very overpriced but not nearly so bad as it could be.”  Think: Too late to buy, too early to sell.

Bonds are yielding next to nothing. While the markets have rebounded in the last couple of weeks, bonds have too. The yield on the 10-year Treasury bond has fallen to a meager 3.22%.

And the economy shows no signs of genuinely rebounding. High unemployment is here to stay. Tax increases are just months away. And business investment, expansion and risk-taking are way down.

It’s a tough time for most investments. And that means it’s a great time for covered call writing - an investment strategy perfectly tailored for this type of market. And, if you’ve not too familiar with covered call writing, there’s a “no hassle” way to take advantage of it.

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There’s nothing worse than bad news to drive a tough market lower.

When the U.S. government announced BP should cut its dividend, it wants to hold BP responsible for wages lost due to the Gulf of Mexico drilling moratorium, and the spill wasn’t going to be stopped anytime soon, that’s exactly what the market got – some bad news.

Since then there have been some bits of positive noise in consumer sentiment and China’s exports, but the market is still facing a lot of headwinds.

And right now is a good time to take a look at the lessons BP has taught this week about investing successfully and how we can apply them to the opportunities created by the spill.

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The herd is running for the exits.

Mutual fund investors are selling out at a faster and faster pace each week.

The Investment Company Institute, which tracks mutual fund inflow and outflows, reports redemptions have been surging in equity mutual funds. The last week of April, investors put in a net $1.85 billion into stock mutual funds. Since then though, it has been all downhill.

Investors pulled out a net $1.44 billion in the first week of May, $10 billion the next week, $1.1 billion the week after that, and $17.4 billion in the last week of May.

It’s happening all over. Canadian investors pulled out between $1 billion and $1.5 billion from mutual funds in May.

The size and consistency of the redemptions has had a noticeable impact on the markets. Aside from the general decline, there real impact can be seen in the last thirty minutes of each trading day.

The last half hour of trading is usually dominated by mutual funds. This relatively brief period is when mutual funds, if they have to meet significant redemptions that day, are forced to sell stocks and raise cash.

The industry which has had as much as $11 trillion of other people’s money to throw around in the U.S. plays a very big role in the markets. That’s why over the last few weeks there have been sizeable sell-offs at the end of a lot of the days (today’s late-afternoon uptick was a rare rebound).

Worried about this startling new trend in mutual fund investors running for the exits?

You shouldn’t be. As history has proven time and time again, mutual fund investors buy and sell at the worst possible times.

So with the mutual fund investors pulling out of stocks, it’s time to take a step back, look at what’s really going on, and get prepared to seize opportunities when they present themselves. Here's where you will find them.

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The only thing that matters in this market is liquidity.

As last Thursday’s market sell-off and this week’s rebound have proven, the only real factor driving the markets higher is liquidity.

That’s why all the recent action directly or indirectly related to the Greek bailout, the European Central Bank (ECB) monetizing more debt, the ongoing bailouts of Fannie Mae and Freddie Mac, and deep deficits of Western governments at all levels, simply further cement the most important trend of the next decade.

It’s a trend that will make fortunes for some and cost others a lot. Here’s how to ensure you’re on the right side of it all.

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Let the speculation begin.

With the Dow falling farther and faster than it ever has before, the financial media begins its search for the “reason” it happened instead of what we really need to know about.

Was it the riots in Greece?

Remember how just a week ago Greece’s problems were good for U.S. stocks? The prevailing reason du jour for stocks going up was investors would pull out of Europe and put their capital to work in the United States.

Or was it the British elections, a “fat-fingered” trade, or China’s monetary tightening measures earlier this week?

Or did a big fund made a highly-leveraged bet that Greek bonds would rebound after the bailout was announced and when they didn’t, it imploded?

The most likely culprit, however, was part of something we touched a few months ago. Back when Goldman Sachs’ traders were booking profits on 98% of trading days, high-frequency trading (HFT) was the hot topic.

While the big traders running the computer-assisted trading programs were banking remarkably steady profits, we looked at the big risk that came with HFT systems controlling 70% of all trading volume:

At some point in the next five to 10 years, another out-of-the-blue crash will likely happen again. Sure, there are limits on how much the major indices can move, but rules and regulations don’t always prevent the next problem, they usually only add to it.

Today was just a taste of what automated markets will bring eventually on the random and unpredictable day.

For now though, we’ll wait for the full details to come out for the who’s and why’s of the whole ordeal. We’ll look at the real impact of the sell-off.

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