The major market averages snapped back yet again last week although the average stock is still well below its previous high. The volatility has been sufficient to improve my sentiment indicators so my model is recommending the establishment of a stock position again. Last week's momentum should allow some further gains - at least in the big name popular stocks.
Estimates for 2014 are in a modestly increasing trend. As long as this continues, my first earnings
indicator is positive.
Looking at earnings 52 weeks ahead, estimates have also increased slowly and the trend remains positive.
With both indicators positive, earnings exposure remains at 100%, same as last week.
Looking at the gap between last twelve month earnings and future 52 week projections,the gap has been shrinking and continued to shrink last week.
There is no adjustment for this gap now since it is smaller and decreasing.
Total earnings factor exposure and maximum total exposure remains at 100%, same as last week.
The equity put/call ratio remains low but not in extreme territory.
Exposure remains at 20%, same as last week.
Small option buyers have definitely gotten more fearful and have increased their put buying.
Exposure increases to 65%, up from 50% last week.
NAAIM managers finally moved away from their fully invested position. They are still heavily invested but not at extreme levels.
Exposure increases to 5%, up from -10% last week.
Average exposure from sentiment factors is 30% this week, up from 0% last week.
My long term valuation indicator remains negative as expected stock returns over the next 10 years
are still below the yield on the ten year treasury.
This factor continues to call for 0 equity exposure.
Percentage of stock prices represented by net current assets remained the same last week.
Exposure remains at 0%, same as last week.
Comparison of stock earnings yield to ten year treasury yield decreased last week.
Exposure decreases to 50%, down from 70% last week.
Total valuation exposure is 17%, down from 23% last week.
To get a combined exposure for these three factors, I multiply them together and then take the cube root. This week that number is 37%, up from 0% 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 have turned neutral in spite of the rally last week.
There is no adjustment this week for this factor.
My trend indicator for new highs - new lows on the Nasdaq is not operative when new highs - new lows are neutral or negative.
Total technical adjustments this week are +10%, up from +5% last week.
After adjustments, total exposure for the week is 47% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and is up from 0% last week.
Richard Moore, CFA
With my wife in Hawaii