I'm still fully hedged but I'm losing a little ground to cash in my real portfolio because my stocks and the average stock are not doing as well as the S & P 500. This type of divergence usually occurs at tops as distribution from strong hands to weak hands takes place. My model still recommends zero exposure to the market although some of my sentiment indicators have shown some modest improvement.
Estimates for 2014 are in a modestly increasing trend. As long as this continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates have also increased slowly and the trend remains positive.
With both indicators positive, earnings exposure remains at 100%, same as last week.
Looking at the gap between last twelve month earnings and future 52 week projections,the gap has
been shrinking and continued to shrink last week.
There is no adjustment for this gap now since it is smaller and decreasing.
Total earnings factor exposure and maximum total exposure remains at 100%, same as last week.
The equity put/call ratio showed a little more put buying last week.
Exposure increases to 20%, up from 5% last week.
Small option buyers also increased their put buying last week.
Exposure increases to 35%, up from 20% last week.
NAAIM managers actually increased their stock exposure last week.
Exposure remains at -10%, same as last week.
When one of my sentiment indicators is maximum bearish and the other two are negative or
neutral, I assign an exposure level of 0%.
This is the same as last week.
My long term valuation indicator remains negative as expected stock returns over the next 10 years
are still below the yield on the ten year treasury.
This factor continues to call for 0 equity exposure.
Percentage of stock prices represented by net current assets remained the same last week.
Exposure remains at 0%, same as last week.
Comparison of stock earnings yield to ten year treasury yield remained the same last week.
Exposure remains at 50%, same as last week.
Total valuation exposure is 17%, same as last week.
To get a combined exposure for these three factors, I multiply them together and then
take the cube root. This week that number is 0%, same as last week.
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 remained negative last week.
I subtract 25% to account for this factor.
Total technical adjustments this week are +5%, same as last week.
After adjustments, total exposure for the week is 5% or, after rounding, 0%.
This level of exposure does not exceed the current earnings cap and is the same as last week.
Richard Moore, CFA
With my wife in Hawaii