This has become a very commonplace situation over the last three years. The market drifts higher as most investors turn complacent and invest their spare cash. Then there is a correction that brings the market back to more reasonable valuation levels. The rallies and corrections have both gotten less impressive but the bullishness on the part of small investors and speculators has reached very extreme levels now. It remains a pretty high risk environment:
Earnings results continue to be in a declining trend but forward 12 month estimates continue to move slightly higher. There is still a growing trend gap between future and past results so
this indicator is negative and calls for zero exposure.
Twelve month forward earnings are still nudging higher and are positive with 100% exposure
but a week or two of declining expectations would turn this indicator neutral or negative.
2013 estimates are my third indicator and they are still trending higher and call for 100% exposure.
Total exposure from the earnings factor is 67%, same as last week.
Rydex leveraged fund investors continued quite bullish but not to previous extremes.
Exposure from this indicator remains at 5%, same as last week.
Small option buyers remain confused and are neutral.
Exposure remains at 50%, same as last week.
NAAIM managers continued to be very optimistic and they even increased their exposure last week.
Exposure remains at -10% this week, the maximum bearish level.
When one of my sentiment indicators is maximum bearish and the other two are either
bearish or neutral, I assign a sentiment factor exposure of 0%, same as last week.
Percentage of stock prices represented by net current assets remained the same last week so exposure continues at 20%, same as last week.
Comparison of stock earnings yield to ten year treasury yield declined last week reflecting the increase in interest rates and the increase in stock prices.
Exposure declines to 20% this week, down from 30% last week.
Total valuation exposure has declined to 20%, down from 25% last week.
To combine these three factors, I multiply them together and then take the cube root. Therefore, these three factors call for a market exposure of 0%, same as last week.
My comparison of yields on treasury bonds compared to lower quality corporates finally did go positive last week.
I add 10% to account for this factor.
New highs - new lows on the Nasdaq are still positive.
I add 20% to account for this factor.
Total technical adjustments this week are +30%, up from +20% last week.
After adjustments, total exposure for the week is 30% or, after rounding, 25% compared to 25% last week.
Richard Moore, CFA
With my wife in Hawaii