Fun While It Lasted

   It didn't take long for small investors and speculators to turn very bullish again as the market hit new highs last week.  The time between these tiny corrections and the subsequent rally seems to be getting shorter and shorter and everyone turns very bullish before there has been any fear introduced into the market.  The biggest positive for the market now is that it is going up.  Also, earnings are hanging in there.  At some point, though, the valuation and sentiment concerns will lead to a significant down move - I think it will be quick and it will be painful when it happens.

Earnings:
Estimates for 2014 are still in an 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 declined meaningfully again last week as put buyers disappeared.
Exposure declines to 5%, down from 35% last week.
Small option buyers are also buying calls again with gusto now.
Exposure declines to 20%, down from 50% last week.
NAAIM managers went all in again last week.
Exposure declines to -10%, down from 20% last week.
When one of my sentiment indicators is maximum bearish and the other two are neutral or negative, I assign a sentiment factor reading of 0%.  This is down from 35% 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 and are actually now below 2%. 
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%, down 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 positive last week. 
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is positive as well so there is
no adjustment for this factor.
Total technical adjustments this week are  +30%, same as last week.

After adjustments, total exposure for the week is 30% or, after rounding, 25%.
This level of exposure does not exceed the current earnings cap and is down from 75% last week.

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