Holding Steady

Although the net result from last week was a minor decline in the S & P 500, there was continued volatility and more underperformance from the average stock.  It looks very much like the beginning of a meaningful correction but we've seen that movie before.  My model is continuing with 50% exposure so I am willing to put some money at risk but I'm not interested in going all in.

Earnings:
Estimates for 2014 are in a modestly increasing trend and last week's numbers were quite good.  As long as this continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates have also increased slowly and the trend remains positive.
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 been shrinking and continued to shrink last week.  I should note, though, that we are close to seeing that gap increasing again.
There is no adjustment for this gap now since it is decreasing.
Total earnings factor exposure and maximum total exposure remains at 100%, same as last week.

Sentiment:
The equity put/call ratio remains low and actually declined marginally last week.  It is still not in extreme territory, though.
Exposure declines to 5%, down from 20% last week.
Small option buyers have definitely gotten more fearful and have increased their put buying.
Exposure remains at 65%, same as last week.
NAAIM managers continued to move away from their fully invested position of a couple of weeks ago.
Exposure increases to 20%, up from 5% last week.
Average exposure from sentiment factors is 30% this week, 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. 
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 unchanged 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 32%, down from 37% 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 returned to a positive position last week.
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is still negative.
I subtract 25% to account for this factor.
Total technical adjustments this week are +5%, down from +10% last week.

After adjustments, total exposure for the week is 42% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and is the same as last week.

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