My portfolio suffered last week even though I have a large cash position.  The smaller stocks I prefer were much weaker than the major averages.  The good news is that earnings expectations remain just marginally positive and sentiment is very positive given the fact that bearishness among small investors and speculators is almost universal.  Valuation also improved last week as my valuation indicator crossed over modestly from bearish to neutral.  It is certainly possible that a major bear market may be just around the corner but we should have a good market rally before the worst of it occurs.  My model is fully invested at this time.

Being reluctant to raise interest rates even 1/4% after seven years of zero has caused investors to start expecting the worst.  It is becoming increasingly likely that the August low will be breached but, if it happens, my model would view it as a good short term buying opportunity.  Earnings expectations of non-commodity companies in the S & P 500 are still increasing although at a very modest rate.  Valuation is still negative but sentiment is quite bullish as small investors and speculators are expecting a disaster.  My model is unchanged at 60% exposure.

The rally last week was only good for a couple of percentage points but that was enough to turn my valuation indicator negative again and reduce exposure to 60% from 100% last week.  Earnings continue to be just marginally positive and that means exposure could be reduced severely in the event of earnings estimate reductions in coming weeks.  For now, though, sentiment factors are very bullish as small investors and speculators expect further downside price action.  If we were to get a new low for the year without a deterioration in earnings expectations, my model would certainly go to a maximum bullish position again, although it might just signal a contratrend move.

For the first time in more than a year my model is calling for a fully invested position.  Last week's market decline was enough to turn the valuation indicator just barely neutral.  Sentiment also improved to the best level since near the bottom in 2009.  Earnings continue to show a tiny positive bias.  I should point out that the rally my model is forecasting could be short lived.  Any price increase will likely turn my valuation indicator negative again and earnings expectations could easily go neutral or even negative if global economic weakness spills over into the US.  Nevertheless, we will take it as it comes and hope this is just a correction - not the beginning of a bear market.