The market looked pretty strong last week but advancers outnumbered decliners by a whopping 16 issues on the NYSE. There are many reasons for extra caution now. Sentiment on the part of small investors and speculators is extremely bullish
Estimates for 2013/2014 continued a modest improvement and remain in a positive trend.
Looking at earnings 52 weeks ahead, estimates are still in an upward trend as optimistic analysts stay very positive.
With both earnings indicators positive, my maximum earnings exposure is 100%.
Looking at the gap between last twelve month earnings and future 52 week projections, while the gap
is larger than I would like to see, it is declining now.
There is no adjustment for the earnings gap so the earnings factor exposure is 100%, the same as last week.
Odd lot investors have become more optimistic in view of the positive market and have
reduced shorting substantially. They are now at an extreme position.
Exposure declines to -10% this week, down from 5% last week.
Small option buyers remain in a neutral position, with call buying and put buying about at
Exposure remains at 50%, same as last week.
NAAIM managers have become scared about missing the rally and continued their bullish posture last week.
Exposure remains at 5% this week, same as last week.
When one of my sentiment indicators is maximum bearish and the other two are neutral or negative, I set the sentiment factor at 0% exposure.
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 remained depressed last week in view of the sharp increase in interest rates.
Exposure remains at 20%, same as last week.
Total valuation exposure is 20%, same as last week.
To combine these three factors, I multiply them together and then take the cube root.
This week, that number is 0%, down from 34% last week.
My comparison of yields on treasury bonds compared to lower quality corporates
remained 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
Total technical adjustments this week are +30%, same as last week.
After adjustments, total exposure for the week is 30% or, after rounding, 25%.
This level of exposure does not exceed the current earnings cap and is down from last week.
Richard Moore, CFA
With my wife in Hawaii