7/1/2012 - Call me a skeptic but I really don't believe the European problems have been solved. The deteriorating earnings outlook is the most important factor influencing my indicators this week:
Earnings estimates for the S & P 500 have finally slipped into a confirmed negative trend. It is certainly true that the stock market could continue to mount a rally by expanding the P/E ratio but it is very hard for stocks to make meaningful progress when earnings expectations are declining. The only good news is that, next week, I will begin to factor in a contribution from 2013 estimated earnings. This will help but we will have to wait and see if it can mitigate the continuing economic weakness. Exposure = 0%, down from 25% last week and shorting the market is now a possibility.
Investors in the Rydex Funds continued to hold extremely bullish positions. They are slowly backing off from their optimistic position but they still have a ways to go. Exposure = -10%, maximum bearish position.
NAAIM investors continued in a neutral position. Exposure = 50%, same as last week.
Small option buyers got just a bit more bearish last week. Exposure = 80%, up from 65% last week.
Total sentiment factor exposure = 40%, up from 35% last week.
Percentage of value represented by net current assets stayed the same last week. Exposure = 60%, same as last week.
Comparison of bond yields to stock earnings yields remained the same last week. Exposure = 50%, same as last week.
Total valuation factor exposure = 55%, same as last week.
When earnings are trending down, I average the sentiment exposure and the valuation exposure and
then subtract 100%. So (40% + 55%)/2 -100% = -52.5% (or 52.5% short). This is a reversal from +36% exposure last week.
I subtract 10% because the ratio of high yield bonds to treasuries is in a downward trend.
This week I add 10% because NH-NL remains positive.
Total technical adjustments are 0% and exposure = (52.5%), down from 36% last week.
Two week moving average is -8%, down from 28% last week. However, my model does not short
when NH-NL is positive or neutral so exposure this week is 0%. I am out of the market until the earnings outlook improves.
Richard Moore, CFA
With my wife in Hawaii