The market acts impressively and wants to look on the bright side. Earnings expectations improved last week and, even though it is hard to see how analysts get to their large increases, it doesn't make sense to fight it as long as the trend is positive.
Estimates for 2013/2014 improved last week and are now in a modestly positive trend.
Looking at earnings 52 weeks ahead, estimates are still in an upward trend but are decelerating. The
indicator is still positive, however.
With both earnings indicators positive, my maximum earnings exposure is 100%.
Then, I consider the gap between reported earnings over the last year and earnings 52 weeks ahead. That gap declined a bit last week but it is still around 28% and trending higher.
When the gap is more than 20% and growing I subtract 25% from my maximum earnings exposure, leading to a maximum exposure of 75% for the earnings factor and this also represents a cap on total exposure of this model. This is up from 50% last week.
Odd lot investors have become more optimistic in view of the positive market and have reduced shorting substantially.
Exposure declines to 20% this week, down from 50% last week.
Small option buyers have become more cautious and have reduced their call buying.
They remain at a neutral sentiment level.
Exposure remains at 65%, same as last week.
NAAIM managers got caught with a pretty high cash position last week and reduced it somewhat.
Exposure declines to 65% this week, down from 80% last week.
Average sentiment exposure this week is 50%, down from 65% 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 remained depressed last week in view of the sharp increase in interest rates.
Exposure remains at 10%, same as last week.
Total valuation exposure is 15%, same as last week.
To combine these three factors, I multiply them together and then take the cube root.
This week, that number is 38%, up from 37% 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
Total technical adjustments this week are +30%, same as last week.
After adjustments, total exposure for the week is 68% or, after rounding, 75%.
This level of exposure does not exceed the current earnings cap and is up from 50% last week.
Richard Moore, CFA
With my wife in Hawaii