It's hard to believe that the little correction we recently experienced was enough to neutralize the wildly bullish sentiment that preceded it. So I won't believe it. Nevertheless, my model remains in a position that calls for some exposure to the stock market and I will be participating. The key to future prosperity is corporate earnings and, so far, estimates have not turned down in a meaningful way. We will see if they continue to hold up.
Estimates for 2014 remain in a flattish trend. Most companies have reported earnings for 2013 and most have guided modestly higher for this year. This is not really a surprise and leaves my
first earnings indicator just modestly positive.
Looking at earnings 52 weeks ahead, estimates remain in a marginally negative trend. It is still not a clear downtrend at this point so I am still calling this indicator neutral for the time being.
With one indicator positive and the other neutral, my maximum earnings exposure is 75%, 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 75%, same as last week.
Odd lot investors continued to short at a basically neutral level last week.
Exposure remains at 50%, same as last week.
Small option buyers snapped back to a more bullish position last week but my 4 week moving average indicator continued to move higher.
Exposure increases to 35%, up from 20% last week.
NAAIM managers also reversed themselves last week and bought some stocks.
Exposure decreases to 35%, down from 50% last week.
My sentiment indicators, on balance, deteriorated somewhat last week as the market snapped back. However, the overall change was not substantial.
Sentiment exposure remains at 40%, same as last week.
My long term valuation indicator remains negative as expected stock returns over the next 5-10 years are the same as the level of the ten year treasury bond yield.
This factor continues to call for 0 equity exposure.
Percentage of stock prices represented by net current assets declined last week.
Exposure decreases to 0%, down from 20% last week.
Comparison of stock earnings yield to ten year treasury yield also decreased last week.
Exposure declines to 50%, down from 70% last week.
Total valuation exposure is 17%, down from 30% 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%, down from 45% last week.
My comparison of yields on treasury bonds compared to lower quality corporates remained positive
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.
My trend indicator for new highs - new lows on the Nasdaq remained in a negative position
last week but just barely so.
I subtract 25% to account for this factor.
Total technical adjustments this week are +5%, same as last week.
After adjustments, total exposure for the week is 42% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and is the same as last week.
Richard Moore, CFA
With my wife in Hawaii