![]() Last week will be remembered as the week the short sellers threw in the towel. There were large outflows from the SH (inverse SPY) ETF and an indicator I watch comparing odd lot short sales to odd lot purchases showed the lowest weekly short sale reading in the last two years (the length of the data available). This negative data continues to be counter-balanced by the continuing positive readings of the trend-following indicators like NH-NL. It seems like we are building to some sort of climax but it remains hard to pinpoint when it will occur. I want to be cautious and ready to abandon ship at the slightest provocation: Earnings: Earnings estimates for both 2012 and 2013 continue in a downtrend and last twelve month earnings are in a flat trend. My weighted number, though, continues to be in a positive trend. Exposure remains the same this week at 100%. Sentiment Factors: Investors in the Rydex Funds continued to hold extremely bullish positions that are again near record levels. Exposure = -10%, maximum bearish position. NAAIM investors turned more bullish again but not enough to change exposure levels. Exposure = 5%, same as last week. Small option buyers got even more bullish and remained in an extreme bullish posture. Exposure = -10%, same as last week. Total sentiment exposure remains at -5% this week. Two of my three sentiment indicators are still in maximum bearish position. They could get even more bearish, of course, but experience has taught me to be very cautious in this risky environment. Valuation: Percentage of value represented by net current assets increased last week. Exposure = 40%, up from 20% last week. Comparison of bond yields to stock earnings yields increased last week as interest rates declined. Exposure = 30%, up from 20% last week. Total valuation factor exposure = 35%, up from 20% last week. With two of my three sentiment factors at maximum negative I assign a total exposure for these three factors of -10% this week. This is the same as last week. Technicals: The trend in high yield bonds compared to treasuries is still in a very slight uptrend so I add 10%. I add 20% when NH-NL is positive as it remains currently. Total technical adjustments are +30% and exposure = 20%, same as last week. Two week moving average is 20%, up from 10% last week.
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![]() 9/16/2012 - I learned long ago that the market is always right. There is no point in objecting that the market shouldn't have done what it did. It is what it is. But I must confess the money-printing rally has me confused. To justify higher stock prices over time there are two factors to consider. Will corporate earnings be higher because of QE3? If so, we should see increases in earnings estimates. What about P/E multiples? I've heard an argument that, because of a reduction in uncertainty and additional monetary support, multiples should increase. Personally, though, with the government such a huge factor in the economic landscape, I would be looking for lower multiples - not higher. I have increased the model's emphasis on trend-following factors this week as an admission that I haven't been paying enough attention to market momentum but I'm still taking a very cautious approach here: Earnings: Earnings estimates for both 2012 and 2013 continue in a downtrend and last twelve month earnings are in a flat trend. My weighted number, though, continues to be in a positive trend. Exposure remains the same this week at 100%. Sentiment Factors: Investors in the Rydex Funds continued to hold extremely bullish positions. Exposure = -10%, maximum bearish position. NAAIM investors backed off just a bit before the QE3 announcement and upped their cash slightly. Exposure = 5%, up from -10% last week. Small option buyers got even more bullish and remained in an extreme bullish posture. Exposure = -10%, same as last week. Total sentiment exposure is -5% this week, up from -10% last week. Two of my three sentiment indicators are still in maximum bearish position. They could get even more bearish, of course, but experience has taught me to be very cautious in this risky environment. Valuation: Percentage of value represented by net current assets stayed the same last week. Exposure = 20%, same as last week. Comparison of bond yields to stock earnings yields declined last week as interest rates increased and the market went up. Exposure = 20%, down from 30% last week. Total valuation factor exposure = 20%, down from 25% last week. With two of my three sentiment factors at maximum negative I assign a total exposure for these three factors of -10% this week. This is up from -20% last week. Technicals: The trend in high yield bonds compared to treasuries is still in an uptrend so I add 10%. I continue to tinker with my model and, this week, I am recognizing that I haven't been paying enough attention to market momentum. So I am adding 20% when NH-NL is positive, as it is this week, instead of the previous 10%. Total technical adjustments are +30% and exposure = 20%, up from 0% last week. Two week moving average is 10%, same as last week. ![]() Perhaps I need to add a fifth factor to my model. The main heading would be Government Meddling and then the sub-factors would be Money Printing, Bailouts, and Interest Rate Manipulation. Those would all be maximum bullish now but my conservative nature thinks they are all very negative in the longer term. Even in the short term, it is good to prevent bankruptcy but increasing commodity prices hurts some companies and all consumers to some extent. I guess I'll stay with the current model for awhile longer: Earnings: Earnings estimates for both 2012 and 2013 continue in a downtrend but both were increased last week. My weighted number continues to be in a positive trend. Exposure remains the same this week at 100%. Sentiment Factors: Investors in the Rydex Funds continued to hold extremely bullish positions. Exposure = -10%, maximum bearish position. NAAIM investors stayed very upbeat to the extent that their bullish position is now in extreme territory. Exposure = -10%, down from 5% last week. Small option buyers took a more bullish position and they too are now in an extreme bullish posture. Exposure = -10%, down from 5% last week. Total sentiment exposure is -10% this week. This is an unusual position that has only occurred a couple of times over the last 6 years. Both previous times didn't last long and saw stock prices decline shortly thereafter. Valuation: Percentage of value represented by net current assets stayed the same last week. Exposure = 20%, same as last week. Comparison of bond yields to stock earnings yields declined last week as interest rates increased and the market went up. Exposure = 30%, down from 50% last week. Total valuation factor exposure = 25%, down from 35% last week. With all three sentiment factors at maximum negative I assign a total exposure for these three factors of -20%. Technicals: 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 = 0%, down from 20% last week. Two week moving average is 10%, down from 20% last week. ![]() 9/2/2012 - I try to put myself in tune with the mindset of those that are buying stocks but I can't seem to feel much optimism. Maybe the Fed can pull another rabbit out of the hat without igniting inflation. We'll see: Earnings: Earnings estimates for 2012 and 2013 continue to slowly decline and my weighted estimate has now turned just slightly positive because the estimate declines are less than the weighting factor as we approach 2013. Can earnings really increase 15.8% over the balance of this year and then increase 11.8% next year? I doubt it but I have increased the earning factor exposure from 50% last week to 100% this week. Sentiment Factors: Investors in the Rydex Funds continued to hold extremely bullish positions. Exposure = -10%, maximum bearish position. NAAIM investors stayed very confidant and increased their already high level of stock holdings. Exposure = 5%, same as last week. Small option buyers took a more bullish position - enough to move them to an almost extreme bullish posture. Exposure = 5%, down from 20% last week. Total sentiment exposure is 0% this week and is now equal to where it was last April with the S & P 500 at approximately the same level. This is the same exposure as last week. Valuation: Percentage of value represented by net current assets stayed the same last week. Exposure = 20%, same as last week. Comparison of bond yields to stock earnings yields improved last week as interest rates declined. Exposure = 50%, up from 30% last week. Total valuation factor exposure = 35%, up from 25% 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%, the same as last week. Technicals: 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%, same as last week. Two week moving average is 20%, down from 32% last week. |
Richard Moore, CFAWith my wife in Hawaii Categories |