How much farther can the market advance? In the short run anything is possible but I don't think it will be too much longer. Sine the fall of 2011, the market has made three legs up, each weaker and with less foundation than the previous leg. The first went 29%, the second 15% and this one has gone 11% so far. It looks like an ascending triangle - not a pretty technical formation:
Earnings results looked very worrisome this week. Last twelve month results declined more than one dollar a share to $88.33 and twelve month forward projections also declined to $110.67. This implies a 25% earnings increase - doesn't seem possible to me. So the gap continues to grow and this indicator is negative, calling for zero exposure.
Twelve month forward earnings are still trending just slightly higher and are positive
with 100% exposure but another week or two of declining expectations would turn
this indicator neutral or negative.
2013 estimates are my third indicator and they too are just barely positive now and could go neutral next week. At this time, though, they are still trending higher and call for 100% exposure.
Total exposure from the earnings factor is 67%, same as last week.
Rydex leveraged fund investors got quite a bit more bullish last week but the indicagtor has not turned extreme just yet.
Exposure from this indicator remains at 5%, same as last week.
Small option buyers remain confused and are neutral. In general, the put/call indicators are the only ones not looking very bearish.
Exposure remains at 50%, same as last week.
NAAIM managers continued to be very optimistic and last week they took the unusual position of being leveraged long. That is not a good thing.
Exposure remains at -10% this week, the maximum bearish level.
When one of my sentiment indicators is maximum bearish and the other two are either bearish or neutral, I assign a sentiment factor exposure of 0%, same as last week.
Percentage of stock prices represented by net current assets remained the same last week so
exposure continues at 20%, same as last week.
Comparison of stock earnings yield to ten year treasury yield declined last week reflecting
the increase in interest rates and the increase in stock prices.
Exposure remains at 20% this week, same as last week.
Total valuation exposure is still 20%, 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 0%, same as last week.
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.
Total technical adjustments this week are +30%, same as last week.
After adjustments, total exposure for the week is 30% or, after rounding, 25%
compared to 25% last week.
Richard Moore, CFA
With my wife in Hawaii