 A sharp turkey week rally aleviated the short term oversold nature of the market but the trend still looks down to me:
Earnings: The divergence between last twelve month earnings and projected earnings for the next 52 weeks just grows and grows. This is negative and results in a continuing zero exposure from this indicator. Twelve month forward earnings are still nudging higher and are positive with 100% exposure. My hybrid method that looks at this year's estimates and weights in 2013 in the second half is also positive and calls for 100% exposure. Total exposure from the earnings factor is 67%, same as last week. Sentiment: Although finally showing some improvement, Rydex investors are still overweighted in stocks. Exposure from this indicator remains at -10%. Small option buyers wanted to play the rally last week as they got more bullish. Not enough to change the exposure, though, which remains at 65%, same as last week. NAAIM managers also turned more bullish. Exposure is 20% this week, down from 35% last week. Total sentiment factor exposure is 25% this week, down from 30% last week. Valuation: Percentage of stock prices represented by net current assets stayed the same last week so exposure remains at 40%. Comparison of stock earnings yield to ten year treasury yield decisively reversed last week as the market advanced and yields went up. Exposure is 50% this week, down from 80% last week. Total valuation exposure is 45%, down from 60% last week. To combine these three factors, I multiply them together and then take the cube root. Therefore, these three factors call for a market exposure of 42%, down from 49% last week. Technicals: My comparison of yields on treasury bonds compared to lower quality corporates turned negative last week. It goes from a zero impact to a negative 10%. New highs - new lows on the Nasdaq improved but remains negative. I subtract 10% to account for this. Total technical adjustments this week are -20% and were -10% last week. After adjustments, total exposure for the week is 22%, down from 39% last week. I've decided to simply use the weekly exposure figures rather than a two week average so we are at 22% this week compared to 46% last week.
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 It is starting to get interesting as the market weakness I have been anticipating is finally showing itself. I don't think this is about the "fiscal cliff." Ultimately, it's about earnings.
Earnings: I've been struggling with how to account for the widening spread between last twelve month results that have been flat for a year and the future expectations that keep working slowly higher. I've come up with a percentage change between the two figures that currently is negative for stock prices and results in a zero exposure from this new indicator. Twelve month forward earnings are still nudging higher and are positive with 100% exposure. My hybrid method that looks at this year's estimates and weights in 2013 in the second half is also positive and calls for 100% exposure. Total exposure from the earnings factor is 67%. Sentiment: Although finally showing some improvement, the Rydex investors are still overweighted in stocks. Exposure from this indicator remains at -10%. Small option buyers have turned cautious. This is somewhat bullish for stocks and exposure is 65%, same as last week. NAAIM managers have also started to moderate their bullishness. Exposure is 35% this week, up from 20% last week. Total sentiment factor exposure is 30% this week, up from 25% last week. Valuation: Percentage of stock prices represented by net current assets stayed the same last week so exposure remains at 40%. Comparison of stock earnings yield to ten year treasury yield has been improving as rates have declined and stock prices have sunk. Exposure is 80% this week, up from 70% last week. Total valuation exposure is 60%, up from 55% last week. To combine these three factors, I multiply them together and then take the cube root. Therefore, these three factors call for a market exposure of 49%, down from 52% last week. Technicals: My comparison of yields on treasury bonds compared to lower quality corporates has become flat and I now regard this indicator as neutral. Last week I was adding 10% but this week is a zero adjustment. New highs - new lows on the Nasdaq has deteriorated further and remains negative. I subtract 10% to account for this. Total technical adjustments this week are -10% and were 0% last week. After adjustments, total exposure for the week is 39%, down from 52% last week. Two week moving average is 46%, up from 31% last week. Due to some health issues, I don't have time to post a full review this week but my model increased stock exposure to 31% from 5% last week. Will try to post the full review soon.
 11/4/2012 – A storm-shortened week didn't change much but the technicals did improve modestly. I have no idea how the election will go or even whether it matters unless the Republicans sweep everything. Then there might be some substantive changes but the key word is "might":
Earnings: I'm looking at two earnings estimate indicators now. The first is a 52 week look ahead at the S & P 500 estimate. This number continues to increase at a very slow pace and is rated as positive and 100% exposure. The other indicator is my own hybrid that looks at current year earnings for the first half of the year and then brings next year's earnings into the mix as the second half of the year progresses. This indicator is showing increases but only because of the next year weighting. It is also at 100% exposure and the average of the two indicators remains the same this week at 100%. Sentiment Factors: Investors in the Rydex Funds continued to hold extremely bullish positions that are near record levels. While there is some indication that these folks are finally becoming less bullish the indicator hasn't changed yet. Exposure = -10%, maximum bearish position. NAAIM investors stayed pretty bullish. Exposure = 20%, same as last week. Small option buyers remained neutral last week. Exposure = 50%, same as last week. When one of my sentiment indicators is maximum bearish and each of the others is neutral or bearish I assign an overall sentiment exposure of 0%. Valuation: Percentage of value represented by net current assets stayed the same last week. Exposure = 60%, same as last week. Comparison of bond yields to stock earnings yields stayed the same last week. Exposure = 50%, same as last week. Total valuation factor exposure = 55%, same as last week. I combine these three factors by multiplying them together and then taking the cube root. These factors, therefore, lead to a 0% exposure, same as last week. Technicals: The trend in high yield bonds compared to treasuries is still in an uptrend so I add 10%. NH-NL improved last week and are now in a neutral zone so I don't change anything because of this factor. Total technical adjustments are +10% and exposure = 10%, up from 0% last week. Two week moving average is 5%, down from 15% last week. |
Richard Moore, CFAWith my wife in Hawaii Categories |
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