The market was down a bit last week but that didn't stop small investors and speculators from taking a more bullish stance. This is still a very risky environment for stocks:
Earnings estimates for 2012 and 2013 continue to slowly decline and my weighted estimate is also very slightly declining but the decline is flattening out. Essentially, we now have a neutral environment for earnings and I have raised the exposure from 25% last week to 50% this week.
Investors in the Rydex Funds continued to hold extremely bullish positions. Last week was one of the most lopsided toward optimism by these investors in the history of this indicator.
Exposure = -10%, maximum bearish position.
NAAIM investors stayed very confidant and held on to a high level of stock holdings.
Exposure = 5%, same as last week.
Small option buyers took a more bullish position - enough to move them to a solid bullish posture. Exposure = 20%, down from 50% last week.
When I have one sentiment factor at maximum bearish and the other two are neutral or negative,
I use 0% as the week's exposure. This is down from 15% last week.
Percentage of value represented by net current assets declined last week.
Exposure = 20%, down from 40% last week.
Comparison of bond yields to stock earnings yields stayed the same last week.
Exposure = 30%, same as last week.
Total valuation factor exposure = 25%, down from 35% last week.
To arrive at my exposure number from these factors, I multiply them together and then take the cube
root. This week, that number is 0%, down from 24% last week.
The trend in high yield bonds compared to treasuries is still in a very slight uptrend so I add 10%.
NH-NL remains positive so I add 10% for that indicator.
Total technical adjustments are +20% and exposure = 20%, down from 44% last week.
Two week moving average is 32%, up from -9%
Richard Moore, CFA
With my wife in Hawaii