No much has changed since last week with one exception.  The performance of the average stock has been miserable compared to the major averages.  This has been a continuing problem and it indicates that risk preferences are not positive for stocks.  I believe we are in a topping pattern that will ultimately be very painful for investors.  In the meantime, sentiment is positive for stocks and earnings are still in a neutral position.  My model continues with a 30% exposure to the market with a good probability of a continuation of this rally in the very short run.  Most of the money in this rally has probably already been made, though.

I am traveling this week so I don't have a full update.  Even though it looks like the market will end up at higher levels before this rally is over, my model is becoming more defensive because small investors are becoming more bullish.  Valuation remains terrible and earnings are still in a situation that could move either way.  My model is reducing exposure to 30% and it could go to zero if the market continues to rally and there is not an earnings improvement.  

The rally I discussed last week occurred right on schedule and it may not be over yet.  While small investors and speculators moved just slightly to a less bearish position they are still extremely bearish and it will take more market strength to make them get bullish again.  In the meantime, my other indicators are moving in opposite directions.  Earnings expectations have improved enough to move that indicator from neutral to bullish-neutral.  The rally last week was enough to reduce my valuation indicator from bearish-neutral to outright bearish.  My model puts all of this together and gets a recommended exposure of 45% this week.  I'm being patient and waiting for more clear-cut guidance before taking either side of the bull vs. bear debate.

I've been traveling so I don't have a full update but the exposure to the stock market this week has dropped all the way to 30%.  Earnings estimates have been reduced again and are now in a neutral position.  Furthermore, I have tried to fine tune my valuation metric and now classify it as neutral - bearish because it is  so marginally above negative.  I really believe that, because sentiment remains extremely bullish, we are going to see a good rally here that will turn small investors and speculators to the bullish camp again.  Then, absent some real economic improvement, I see a substantial downdraft in equities.  However, with all the uncertainty about domestic economics and foreign conflicts, any rally could be short-lived.  The risk seems very high while the reward looks only technical and temporary.  I would use strength to reduce exposure to risk assets.