We have arrived at a classic stand-off for the indicators in my model. Momentum is calling for higher prices as the market grinds higher. However, sentiment is very bearish for stock prices. When stock mutual fund inflows are strongly positive, a big down move can't be far behind:
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.
Now I am looking at 2013 estimates for 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 are confused again and remain neutral.
Exposure remains at 50%, same as last week.
NAAIM managers continued to be very optimistic and they jumped back into extreme territory last week. See this week's chart.
Exposure decreases to -10% this week, down from 5% last week.
When one of my sentiment indicators is maximum bearish and the other two are either bearish or neutral, I assign a reading of 0% this week, down from 20% last week.
Percentage of stock prices represented by net current assets declined last week so exposure goes to 20%, down from 40% last week.
Comparison of stock earnings yield to ten year treasury yield remained the same last week.
Exposure remains at 30% this week, same as last week.
Total valuation exposure has declined to 25%, down from 35% 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%, down from 36% last week.
My comparison of yields on treasury bonds compared to lower quality corporates didn't go positive last week as I had expected but it is still on the verge of doing so. At this point, though,
it is neutral and has a zero impact on technical factors.
New highs - new lows on the Nasdaq are still positive. I add 20% to account for this factor.
Total technical adjustments this week are +20%, same as last week.
After adjustments, total exposure for the week is 20% or, after rounding, 25% compared to 50% last week.
Richard Moore, CFA
With my wife in Hawaii