![]() For the first time since early this year my model has gone to a zero percent exposure to stocks. I actually use hedging techniques in my portfolio to achieve this nex exposure. Simply put, the conventional wisdom of continued slow earnings growth coupled with money printing in perpetuity by the Fed just seems over exposed. Virtually everyone is bullish including individual investors, Rydex leveraged fund investors, newsletter writers, small option buyers and agressive money managers. The risk/reward ratio just looks poor at this point. Earnings: Estimates for both 2013 and 2014 are now in clear downtrends but the fact that I am shifting weight from this year to next is allowing my first earnings indicator to remain positive. Looking at earnings 52 weeks ahead, estimates are still in an upward trend as optimistic analysts stay very positive. Earnings expectations have gotten a little better in the past couple of weeks. With both earnings indicators positive, my maximum earnings exposure is 100%. Looking at the gap between last twelve month earnings and future 52 week projections, the gap is very large and is growing but not by much. I subtract 25% to account for this growing gap. Total earnings factor exposure and maximum total exposure is therefore 75%, same as last week. Sentiment: Odd lot investors are virtually the only group that is not wildly bullish. They remain neutral. Exposure remains at 50%, same as last week. Small option buyers remained very bullish last week. Exposure remains at 5%, same as last week. NAAIM managers became still more bullish last week and have now moved into extreme territory. Exposure declines to -10% this week, down from 5% last week. When one of my sentiment indicators is maximum bearish and the other two are bearish or neutral, I assign a sentiment factor exposure of 0%. Valuation: Percentage of stock prices represented by net current assets remains at the lowest level possible. Exposure remains at 0%, same as last week. Comparison of stock earnings yield to ten year treasury yield remained neutral last week. Exposure remains at 50%, same as last week. Total valuation exposure is 25%, same as last week. To combine these three factors, I multiply them together and then take the cube root. This week, that number is 0%, down from 33% 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 are still positive. I add 20% to account for this factor. My trend indicator for new highs - new lows on the Nasdaq slipped into negative position last week. I subtract 25% to account for this factor. Total technical adjustments this week are +5%, down from +30% last week. After adjustments, total exposure for the week is 5% or, after rounding, 0%. This level of exposure does not exceed the current earnings cap and is down from 75% last week.
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With my wife on Aruba
December 2019 Categories |