12/30/2012 – I made numerous changes to my model since first posting it here in June, 2012. Therefore, the results are not achieved in real time. These real-time changes have, I believe, made the model better and I am very happy with its prospects. I am using this model extensively in my own portfolio. For 2013, I am not going to be making any changes in the model during the year and I will show performance on a year to date basis on page 1. My objective is to achieve results that are at least one half of market returns in bullish periods and suffer only minimal declines in bearish periods. (I should point out that this model assumes only investment in the S & P 500. I am using various screening techniques to arrive at attractive individual stock purchases when possible.) If I cannot achieve those results in 2013, I will put less emphasis on this model in the future:
Earnings estimates took a bit of a hit last week and finally caught up to some extent with the declining last twelve month results. There is still a growing trend gap between future and past results, however, so this indicator is negative and calls for zero exposure. Twelve month forward earnings are still nudging higher and are positive with 100% exposure. My hybrid method that looks at this year's estimates and weights in 2013 in the second half is also positive and calls for 100% exposure.
Total exposure from the earnings factor is 67%, same as last week.
Rydex leveraged fund investors continued quite bullish but not to previous extremes. Exposure from this indicator remains at 5%, same as last week.
Small option buyers became more concerned last week.
Exposure increased to 65%, up from 50% last week.
NAAIM managers continued to get even more optimistic. They are in extreme wildly bullish territory now.
Exposure is -10% this week, same as last week.
Total exposure from sentiment factors is now at 20%, up from 0% last week.
Percentage of stock prices represented by net current assets stayed the same last week so exposure remains at 40%.
Comparison of stock earnings yield to ten year treasury yield stayed the same last week. Exposure is 50% this week, same as last week.
Total valuation exposure is 45%, same as last week.
To combine these three factors, I multiply them together and then take the cube root. Therefore, these three factors call for a market exposure of 39%, up from 0% last week.
My comparison of yields on treasury bonds compared to lower quality corporates stayed negative last week. I subtract 10% to account for this.
New highs - new lows on the Nasdaq looks even more like it is going to whipsaw but, so far, it is still positive. I add 20% to account for this factor.
Total technical adjustments this week are +10%, same as last week.
After adjustments, total exposure for the week is 49% or, after rounding, 50% compared to 0% last week.
Richard Moore, CFA
With my wife in Hawaii