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Government Reopening Is A Positive?

10/20/2013

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  I've got to admit that the market has a tremendous amount of momentum but it is very hard to see the rationale for this move.  Yes, the government reopened - but it was a short-term deal.  None of the substantive factors in my model is really strong and some are downright weak.  I'm going to back off and see if this is a blowoff or not.

Earnings:
Estimates for both 2013 and 2014 are now in a clear downtrend but the fact that I am shifting weight from this year to next is allowing my first earnings indicator to remain positive.
Looking at earnings 52 weeks ahead, estimates are still in an upward trend as optimistic analysts stay very positive.  The trend is slowing, however.
With both earnings indicators positive, my maximum earnings exposure is 100%.
Looking at the gap between last twelve month earnings and future 52 week projections, the gap is very large and is now growing again.   
I subtract 25% to account for this growing gap. 
Total earnings factor exposure and maximum total exposure is therefore 75%, down from 100% last week.
 
Sentiment: 
Odd lot investors remain in a neutral position. 
Exposure remains at 50%, same as last week.
Small option buyers really stepped up their bullishness last week and now in extreme territory. 
Exposure declines to -10%,  down from 20% last week.
NAAIM managers became more bullish last week but not enough to change the indicator's reading. 
Exposure remains at 20% this week, same as last week.
When one sentiment factor is maximum bearish and the other two are neutral or negative, I set the sentiment factor for the week to 0%.  This is down from 30% last week.
 
Valuation:
Percentage of stock prices represented by net current assets remains at the lowest level possible.
Exposure remains at 0%, same as last week.
Comparison of stock earnings yield to ten year treasury yield remained neutral last week.
Exposure remains at 50%, same as last week.
Total valuation exposure is 25%, same as last week.

To combine these three factors, I multiply them together and then take the cube root. 
This week, that number is 0%, down from 44% 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 are still positive.
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq turned back positive last week so there is no reduction in exposure based on this indicator.
Total technical adjustments this week are +30%, up from +5% 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 down from 50% last week.





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