12/16/2012 – More of the same last week as the market continued to churn and try to come to grips with the 2013 outlook. I think investors believe that we won't go over the fiscal cliff for very long but the real problem for me is the realization that, at some point, earnings estimates will have to be reduced unless the economy gets much stronger.
The divergence between last twelve month earnings ($88.44) and projected earnings for the next 52 weeks ($110.11) 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.
Rydex leveraged fund investors continued quite bullish but not to previous extremes. Exposure from this indicator remains at 5%, same as last week.
Small option buyers are continuing in a neutral posture.
Exposure stays at 50%, same as last week.
NAAIM managers decided to get much more optimistic. They haven't gone to extreme bullishness yet, but they are very close.
Exposure is 5% this week, down from 20% last week.
Total sentiment factor exposure is 20% this week, down from 25% last week.
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 stayed the same last week. Exposure is 50% this week, same as last week.
Total valuation exposure is 45%, same as 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 39%, down from 42% last week.
My comparison of yields on treasury bonds compared to lower quality corporates stayed negative last week. I subtract 10% to account for this.
New highs - new lows on the Nasdaq popped up last week and is now positive. We could be set up for yet another whipsaw from this indicator but I am adding 20% this week instead of 0% last week when the indicator was neutral.
Total technical adjustments this week are +10% and were -10% last week.
After adjustments, total exposure for the week is 49% or, after rounding 50%, compared to 25% last week.
Richard Moore, CFA
With my wife in Hawaii