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December Could Be Interesting

12/1/2013

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  Year end rallies and merriment are the conventional wisdom of Wall Street but, if my indicators are correct, the start of a correction is more likely.  While the momentum may keep the market afloat for another week or two, this is a very high risk situation that could deteriorate rapidly.  Just as one note of caution, investors in the Nasdaq leveraged bull fund have 20 times more invested than those brave souls in the leveraged Nasdaq bear fund.  That is as lopsided as it gets and there are numerous other examples of the bullishness exhibited by investors currently.

Earnings:
Estimates for both 2013 and 2014 remain in downtrends but the fact that I am shifting weight from this year to next is allowing my first earnings indicator to remain positive.
Looking at earnings 52 weeks ahead, estimates are still in an upward trend as optimistic analysts stay very positive.
With both earnings indicators positive, my maximum earnings exposure is 100%.
Looking at the gap between last twelve month earnings and future 52 week projections, the gap remains large but it is slowly shrinking.
There is no adjustment for this gap now since it is decreasing.
Total earnings factor exposure and maximum total exposure is therefore 100%, same as
last week.

Sentiment: 
Odd lot investors are still turning more bullish as the upward pressure continues.  
Exposure declines to 20%, down from 35% last week.
Small option buyers started buying calls more aggresively last week.
Exposure remains at 20%,  same as last week.
NAAIM managers got even more bullish and even went on margin to buy stocks last week. 
They remain in an extreme bullish position.
Exposure remains at -10%, same as last week.
Total sentiment factor exposure this week remains at 0%, same as last week because when one of the sentiment factors is maximum bearish and the other two are neutral or negative I assign a 0 exposure
to this factor.

Valuation:
I have been using two valuation factors that I would consider to be short-term.  This week I am adding a third factor that is long-term in nature.  Basically, the approach looks at P/E ratios on trailing ten year earnings for the S & P 500 and projects an expected return for stocks over the next ten years.  Currently, this projections indicates an expected negative ten year forward return and therefore the valuation exposure for this factor is 0% this week.  To find out more, go to hussmanfunds.com.
Percentage of stock prices represented by net current assets remained the same last week.
Exposure remains at 20%, same as last week.
Comparison of stock earnings yield to ten year treasury yield remained the same last week.
Exposure remains at 30%, same as last week.
Total valuation exposure is 17%, down from 25% last week.

To combine these three factors, I multiply them together and then take the cube root.
This week, that number is 0%, same as last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates remained positive last week.
I add 10% to account for this factor.
New highs - new lows on the Nasdaq are still positive.
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq turned just marginally positive last week.
There is no current adjustment for this factor.
Total technical adjustments this week are +30%, same as last week.

After adjustments, total exposure for the week is 30% or, after rounding, 25%.
This level of exposure does not exceed the current earnings cap and is the same as last week.




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    Richard Moore, CFA

    With my wife in Hawaii
    ​May 2016

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