10/28/2012 – The battle appears to be shifting in favor of the bears. Earnings are still hanging in there, though, so this may just turn out to be a correction:
The earnings increase I alluded to last week didn't really happen. My data provider immediately reposted results on Monday showing the continuing decline in 2012 and 2013 estimates. It didn't affect the end result that earnings are still increasing because 2013 estimates are being added to the mix as we approach the end of the year. This week saw a small increase in estimates so exposure remains the same this week at 100%.
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 became less bullish last week. They are now at a neutral
Exposure = 50%, up from 35% 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%.
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.
The trend in high yield bonds compared to treasuries is still in an uptrend so I add 10%.
NH-NL flipped last week and are now negative. This means I subtract 10% for this factor.
Total technical adjustments are 0% and
exposure = 0%, down from 30% last week.
Two week moving average is 15%,
down from 30% last week.
Richard Moore, CFA
With my wife in Hawaii