The major averages are very tough competition this year and I'm sure most investors are not doing as well as, for example, the S & P 500.  Most stocks are doing poorly with the Russell 2000 now down almost 4% year to date.  These conditions of shrinking leadership almost always occur before corrections or bear markets.  Last week sentiment measures improved just a bit more but technical indicators are now bearish.  On balance, my model improved just enough to warrant a small stock exposure.

Earnings:
I am adding in 2015 earnings expectations now that we are in the final half of the year.  This 
weighted estimate for 2014-2015 is still in an uptrend.
As long as this continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates are also in  a clear uptrend.
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 remains at negative levels and that gap is increasing.
The large and widening gap dictates a reduction in the earnings factor by 25%.
Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment: 
The equity put/call ratio improved to a neutral position last week.
Exposure increases to 50%, up from 20% last week.
Small option buyers have also backed away from their very optimistic call purchases.
Exposure increases to 20%, up from 5% last week.
NAAIM managers continued to increase their cash position marginally.
Exposure remains at 20%, same as last week.
Average sentiment exposure is 30% this week, up from 15% last week.

Valuation:
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 and are now back below 2%. 
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 remained the same last week.
Exposure stays at 50%, same as last week.
Total valuation exposure is 17%, same as 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 33%, up from 27% last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates remained in a  
decline last week.  In fact, the decline is accelerating.
I subtract 10% to account for this factor. 
New highs - new lows on the Nasdaq turned negative last week. 
I subtract 10% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is not operative now since the previous indicator is negative.
Total technical adjustments this week are -20%, down from -15% last week.

After adjustments, total exposure for the week is 13% or, after rounding, 25%.
This level of exposure does not exceed the current earnings cap and is up from 0% last week.

I don't have time for a full update this week but there is no change my model's zero recommendation for exposure to the stock market.  Last week was very typical:  New highs in the major averages while most stocks were down and small stock averages like the Russell 2000 look like they have topped.  These technical factors are keeping me hedged even though there has been some small improvement in sentiment.  Valuation remains very poor with the expected 10 year return from stocks at 1.8% compounded.  Since that number is lower than the current dividend yield, a lower price for the S & P 500 in ten years is what the forecast means.  I remain cautious and hedged.

The sloppy market last week caused investors to take a second look at their growing bullish sentiment and some of them backed off just a bit.  Technically some damage was done, though, so my model shows no change to stock market exposure this week.  The market continues to look very vulnerable and I continue my fully hedged position.

Earnings:
I am adding in 2015 earnings expectations now that we are in the final half of the year.  This
weighted estimate for 2014-2015 is still in an uptrend.
As long as this continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates are also in  a clear uptrend.
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 remains at negative levels and that gap is increasing.
The large and widening gap dictates a reduction in the earnings factor by 25%.
Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment: 
The equity put/call ratio stalled out last week at bearish, but not extreme, levels.
Exposure remains at 20%, same as last week.
Small option buyers also continue to mostly keep buying calls.
Exposure remains at 5%, same as last week.
NAAIM managers got just a bit concerned last week and increased their cash position.
Exposure increases to 5%, up from -10% last week.
Average sentiment exposure is 10% this week, up from 0% last week.

Valuation:
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 and are now back below 2%.  
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 remained the same last week.
Exposure stays at 50%, same as last week.
Total valuation exposure is 17%, same as 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 23%, up from 0% last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates remained in a  
decline last week.
I subtract 10% to account for this factor. 
New highs - new lows on the Nasdaq remained positive last week. 
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq slipped into negative territory last week.
I subtract 25% to account for this factor.
Total technical adjustments this week are -15%, down from +10% last week.

After adjustments, total exposure for the week is 8% or, after rounding, 0%.
This level of exposure does not exceed the current earnings cap and is the same as last week.

After only four weeks of exposure to the stock market, my sentiment indicators turned negative again, leading my model to reduce its stock position to a net zero.  Last week showed internal weakness again as more stocks declined than advanced.  So far this year to date, my sentiment indicators have been zero or negative for 20 weeks - that is compared to only 15 weeks all last year and only a few weeks the year before that.  Basically, the possible good news seems to be discounted at current price levels and possible bad news has been disregarded by investors.  This has created a very unfavorable risk/reward ratio and I have retreated again to a fully hedged position.

Earnings:
I am adding in 2015 earnings expectations now that we are in the final half of the year.  This
weighted estimate for 2014-2015 is still in an uptrend.
As long as this continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates are also in  a clear uptrend.
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 remains at negative levels and that gap is increasing.
The large and widening gap dictates a reduction in the earnings factor by 25%.
Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.
  
Sentiment: 
The equity put/call ratio continues to decline as option buyers get more aggressive.
Exposure declines to 20%, down from 35% last week. 
Small option buyers also continue to take a bullish view of this market.
Exposure declines to 5%, down from 20% last week.
NAAIM managers continued to reinvest their cash last week and are now fully invested again.
Exposure declines to -10%, down from 20% last week.
When one of my sentiment indicators is maximum negative and the other two are neutral or negative I assign a value of zero to the sentiment factor.  This is down from 25% last week.

Valuation:
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 and are now back below 2%.
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 remained the same last week.
Exposure stays at 50%, same as last week.
Total valuation exposure is 17%, same as 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 0%, down from 31% last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates remained in a
decline last week.
I subtract 10% to account for this factor. 
New highs - new lows on the Nasdaq remained positive last week. 
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is also positive and requires
no adjustment.
Total technical adjustments this week are +10%, same as last week.

After adjustments, total exposure for the week is 10% or, after rounding, 0%.
This level of exposure does not exceed the current earnings cap and is down from 50% last week.

It was another "feel good" week as the S & P 500 hit more new highs above the 2000 mark.  Technical factors remain strong with the exception of the performance of high yield bond funds compared to Treasury bonds.  The rally in Treasury bonds has not been duplicated by high yield funds.  Why are investors willing to push stock prices higher but not junk bond prices?  My model is holding at 50% exposure but it would only take one more strong week to push sentiment factors negative as they have been for much of this year.

Earnings:
I am adding in 2015 earnings expectations now that we are in the final half of the year.  This
weighted estimate for 2014-2015 is still in an uptrend.
As long as this continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates are also in  a clear uptrend.
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 reached negative levels and that gap is increasing.
The large and widening gap dictates a reduction in the earnings factor by 25%.
Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment: 
The equity put/call ratio continues to decline as option buyers get more aggressive.
Exposure declines to 35%, down from 50% last week.
Small option buyers also continue to take a bullish view of this market.
Exposure remains at 20%, same as last week.
NAAIM managers quickly put money to work last week.
Exposure declines to 20%, down from 50% last week.
Average sentiment exposure this week is 25%, down from 40% last week.

Valuation:
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 and are now back below 2%. 
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 remained the same last week.
Exposure stays at 50%, same as last week.
Total valuation exposure is 17%, same as 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 31%, down from 37% last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates remained in a
decline last week.
I subtract 10% to account for this factor. 
New highs - new lows on the Nasdaq remained positive last week. 
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is also positive and requires no adjustment.
Total technical adjustments this week are +10%, same as last week.

After adjustments, total exposure for the week is 41% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and the same as last week.