Divergences Continue

   Not much change in the S & P 500 last week but the Russell 2000 continues its weakness.  My model has improved a bit reflecting an improvement in valuation because of a decline in interest rates but I really would not be surprised by anything that might happen in the short run.  It is still time to hold significant cash reserves and watch for signs that earnings may not come through as anticipated later this year.

Earnings:
Estimates for 2014 declined modestly last week but are still in a nice uptrend.  As long as this continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates are also in  a clear uptrend.
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 reached negative levels and that gap is increasing.
The large and widening gap dictates a reduction in the earnings factor by 25%.
Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment:
The equity put/call ratio continues to increase and is now at a neutral level.
Exposure increases to 50%, up from 35% last week.
Small option buyers have also moved to a neutral level by slightly reducing their put purchases.
Exposure declines to 50%, down from 65% last week.
NAAIM managers remain bullish and represent the most bearish of my sentiment indicators.
Exposure remains at 5%, same as last week.
Average exposure from sentiment factors is 35% this week, same as last week.

Valuation:
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 increased last week due to the decline in the 10 year Treasury yield.
Exposure increases to 70%, up from 50% last week.
Total valuation exposure is 23%, up from 17% 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 39%, up from 35% 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 remained negative last week.  
I subtract 10% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is not operative when NH-NL is neutral or negative.
Total technical adjustments this week are 0%, same as last week.

After adjustments, total exposure for the week is 39% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and is up from 25% last week.

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