After ten weeks of decline and then rally, we find ourselves back where we started. The major averages are higher but the average stock and the Russell 2000 are not hitting new highs. Last week, in fact, there were more declines than advances on the NYSE. My model is back to a zero exposure recommendation because risk/reward characteristics are unfavorable again. I am back to a fully hedged position in my portfolios.
I am adding in 2015 earnings expectations now that we are in the final half of the year. This
weighted estimate for 2014-2015 is still in an uptrend although estimate reductions could change that.
As long as the uptrend continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates have reversed and are still marginally negative. This indicator is still rated neutral.
With one indicator positive and the other neutral, the earnings indicator remains at 75%, the same as last week..
Looking at the gap between last twelve month earnings and future 52 week projections, the gap remains at negative levels but the gap is no longer increasing.
The shrinking gap means that there is no adjustment to be factored in.
Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.
The equity put/call ratio declined some more last week as put buying is drying up.
Exposure declines to 35%, down from 50% last week.
Small option buyers have also become much more positive and stopped buying puts.
Exposure declines to 20%, down from 50% last week.
NAAIM managers continued to put cash to work last week and are now essentially fully invested again.
Exposure declines to -10% this week, down from 5% last week.
When one of my sentiment indicators is maximum negative and the other two are neutral or negative I assign an overall sentiment reading of 0%. This is down from 25% last week.
My long term valuation indicator remains negative as expected stock returns over the next 10 years are now back below the yield on the ten year treasury bond and are now back below 2%.
This factor continues to call for 0 equity exposure.
Percentage of stock prices represented by net current assets increased last week.
Exposure increases to 20%, up from 0% 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 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 0%, down from 35% last week.
My comparison of yields on treasury bonds compared to lower quality corporates remained in a
decline last week.
I subtract 10% to account for this factor.
New highs - new lows on the Nasdaq stayed positive last week.
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is not operative now since it is also positive.
Total technical adjustments this week are +10%, same as last week.
After adjustments, total exposure for the week is 10% or, after rounding, 0%.
This level of exposure does not exceed the current earnings cap and is down from 50% last week.
This week the top five ranked stocks used in my aggressive screen are: AMOT, LDL, STRT, PLOW and CSCD.
Richard Moore, CFA
With my wife in Hawaii