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Hanging On To A Small Position

6/22/2014

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  Last week I cautioned that any strength for the week would likely have my model totally out of the market.  That didn't quite happen, though, as my final sentiment indicator just barely hung on to a bearish, but not extreme, reading.  Nevertheless, the risk/reward ratio continues indicate large risk potential with very limited return possibilities.  There are any number of event risks that could change the psyche of investors in a hurry and there is also a rising inflation risk that could make investments other than commodities become losers in no time.  I'm holding to a 25% exposure but wouldn't argue against a lower number.

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 remains at -10%, same as last week.
Small option buyers are also increasing their bullish exposure and are now very, very close to extreme territory.
Exposure remains at 5%, same as last week.
NAAIM managers stayed all in last week. 
Exposure remains at -10%, same as last week.
When two of my sentiment indicators are maximum bearish and the other one is neutral or
negative, I assign a sentiment factor reading of -10%.  This is the same as 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 declined last week.
Exposure declines to 30%, down from 50% last week.
Total valuation exposure is 10%, down from 17% last week.

To get a combined exposure for these three factors, I multiply them together and then take the cube root.  However, since the sentiment factor is -10%, I assign an overall exposure for the three factors  at -10%.  This is the same as 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 20% or, after rounding, 25%.
This level of exposure does not exceed the current earnings cap and is the same as last week.




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