We did indeed get a bit of a rally last week although, I must say, my stock holdings were not leading factors. I was thrown a curve ball by my data provider when they updated their timing of updating earnings estimates last week. The data will now be updated more quickly and should be more useful. However, the configuration of expected earnings for my modified S & P earnings has changed. Looking at the numbers now I see worse performance over the last several weeks but a sharp upside reversal in the past two weeks. So analysts are either increasing estimates for 2016 or the calendar is pushing earnings considerations out another three months. This is not to suggest we are looking at a positive bullish earnings factor. It is just not as bearish as it was and earnings expectations are now classified as neutral. The other shift toward a more bullish outlook came in the sentiment indicators as small investors and speculators became somewhat more bearish in their activity. So, on balance, my model is taking a slightly more constructive view and suggests an exposure of 30% at this time. Hopefully, the year-end rally will continue for at least a few more days.
In keeping with the spirit of the season, I wish I could be more upbeat about the future for stocks. However, there were no changes in my model last week and it remains at a zero level of exposure to the equity market. Earnings expectations continued to decline last week and are just barely still hanging on to a neutral-bearish classification. Valuation and sentiment are both poor also. As measured by the Value Line Geometric Average, the average stock is now down about 16% from its high and I fully expect the major averages to catch up after what may be a year-end rally in the final days of 2015.
After a disaster like last week, it does feel good to have avoided that capital loss. The bad news is that there may be more of the same ahead. Earnings expectations slipped again last week and are now categorized as neutral - bearish. Valuation improved a bit with the decline but only to a neutral - bearish level. Sentiment also improved just marginally and is still regarded as neutral - bearish. I still believe that earnings will soften further leading to a more meaningful decline in stock prices. The average stock is already down 12% year to date. I am maintaining a fully hedged position.
Friday's rally was probably exciting for some investors but we ended the week a little worse than we started it. The S & P 500 was up a few pennies for the week but there were almost a thousand more declining stocks than advancers on the NYSE and the average stock was down more than 1%. Earnings expectations continue to slowly decline and could turn outright negative at any time. Valuation remains too high and sentiment is problematic. My model still holds at zero stock market exposure.
Richard Moore, CFA
With my wife in Hawaii