Earnings results going forward still are the key, I believe, to the health of the stock market for the balance of this year. Based on what I hear on CNBC, second quarter results will not be very good. If we continue to muddle through with minimal earnings gains for the rest of this year, I don't see how the market can advance.
Earnings results continue to be flat to down as they are reported. Earnings have been essentially flat now for about 18 months. The gap between last twelve month results and future twelve month
expectations is still more than 28% and it continues to grow.
This indicator continues to suggest 0% exposure this week.
Twelve month forward earnings are still trending higher but may have reached a temporary peak.
This indicator is still positive at this point with 100% exposure.
2013 estimates are my third indicator and they are still trending lower but just marginally so.
This indicator remains in a neutral-negative status and calls for 25% exposure.
Total exposure from the earnings factor is 42%, same as last week.
I have been wrestling with my overall exposure and how it relates to earnings and have decided that I need to pay more attention to this factor. From now on, I will be capping my overall exposure based on the earnings factor. This week, with one of the indicators very negative, one neutral and one positive but deteriorating, my earnings factor model results total exposure at 25%.
Odd lot investors have moved away from an extreme bearish position as they have
increased their levels of shorting. This indicator remains neutral.
Exposure remains at 50% this week, same as last week.
Small option buyers have become more cautious and have reduced their call buying.
They remain at a neutral sentiment level.
Exposure increases to 65%, up from 50% last week.
NAAIM managers have also gotten more concerned. They have increased their cash levels but are still essentially neutral.
Exposure increases to 65% this week, up from 50% last week.
Average sentiment exposure this week is 60%, up from 50% last week.
Percentage of stock prices represented by net current assets remained the same last week so
exposure continues at 20%, same as last week.
Comparison of stock earnings yield to ten year treasury yield was unchanged last week.
Exposure remains at 20%, same as last week.
Total valuation exposure is 20%, same as last week.
To combine these three factors, I multiply them together and then take the cube root.
This week, that number is 37%, up from 35% 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.
Total technical adjustments this week are +30%, same as last week.
After adjustments, but before the cap mentioned above in the earnings section, total exposure for the week would be 67% or, after rounding, 75% compared to 75% last week.
Because of the uncertain earnings outlook, I am using a cap this week of 25% exposure. I have backtested my earnings cap approach with positive results and note that it has not been needed in the past for more than a few weeks. The earnings factor should become clearer as second quarter results are announced.
Richard Moore, CFA
With my wife in Hawaii