8/12/2012 - It sure is frustrating seeing the market grind higher in the face of what I consider to be a very poor environment for equities. I guess some investors think the earnings problems are only
temporary and feel that they have no decent investment alternatives given the low interest rates. I'm still pessimistic:
The trend in estimated earnings is still slightly down but the trend is no longer accelerating. Part of the reason for the improvement is the slow weighting in of 2013 estimates that are still well above 2012 numbers. I'm not sure of the rationale for the expected increase other than the fact that analysts tend to be optimistic.
Exposure = 0%, same as last week and shorting the market is a possibility.
Investors in the Rydex Funds continued to hold extremely bullish positions.
Exposure = -10%, maximum bearish position.
NAAIM investors backed off their bullish position just a bit last week.
Exposure = 20%, up from 5% last week.
Small option buyers seem confused and remain neutral.
Exposure = 50%, same as last week.
Total sentiment factor exposure = 20%, up from 15% last week.
Percentage of value represented by net current assets remained the same.
Exposure = 40%, same as last week.
Comparison of bond yields to stock earnings yields moved higher as interest rates increased. Exposure = 30%, down from 50% last week.
Total valuation factor exposure = 35%, down from 45% last week.
When earnings are trending down, I average the sentiment exposure and the valuation exposure and then subtract 100%. So (20% + 35%)/2 -100% = -72.5% (or 72.5% short). This is down from -70% exposure last week.
The trend in high yield bonds compared to treasuries is still in a very slight uptrend so I add 10%.
NH-NL went slightly positive last week and I now consider it neutral leading to no adjustment for this factor.
Total technical adjustments are +10% and exposure = (62.5%), up from (70%) last week.
Two week moving average is -66%, up from -69% last week. My model remains short but would go
to zero exposure if NH-NL improves in a significant way.
Richard Moore, CFA
With my wife in Hawaii