I'm Out

It was a pretty uneventful week but one of my technical indicators weakened enough to take my model totally out of the market (I am actually using hedging to obtain the zero exposure).  There are plenty of potential event risks to worry about but, more importantly, valuation and sentiment continue to be quite negative.  The risk reward ratio seems very negative and I will be happy to watch from the sidelines for awhile.  The coming week is a short one and will probably not be very volatile unless there is some bad international news breaking but a flat market is likely the best expectation.  Enjoy the Fourth of July!

Earnings:
Estimates for 2014 are still in an uptrend.  As long as this continues, my first earnings indicator is
positive.
Looking at earnings 52 weeks ahead, estimates are also in  a clear uptrend.
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
reached negative levels and that gap is increasing.
The large and widening gap dictates a reduction in the earnings factor by 25%.
Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.

Sentiment:  
The equity put/call ratio continued at very low levels last week as put buyers are still missing.
Exposure remains at -10%, same as last week.
Small option buyers are also very bullish but still haven't crossed into extreme territory.
Exposure remains at 5%, same as last week.
NAAIM managers stayed all in last week.
Exposure remains at -10%, same as last week.
When two of my sentiment indicators are maximum bearish and the other one is neutral or
negative, I assign a sentiment factor reading of -10%.  This is the 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 and are actually now below 2%. 
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 increased last week.
Exposure increases to 50%, up from 30% last week.
Total valuation exposure is 17%, up from 10% last week.

To get a combined exposure for these three factors, I multiply them together and then take the cube root. However, since the sentiment factor is -10%, I assign an overall exposure for  the three factors  at -10%.  This is the same as last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates went to a neutral position last week.
There is no adjustment for this factor since it is now neutral. 
New highs - new lows on the Nasdaq remained positive last week. 
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is positive as well so there is no adjustment for this factor.
Total technical adjustments this week are +20%, down from +30% last week.

After adjustments, total exposure for the week is 10% or, after rounding, 0%.
This level of exposure does not exceed the current earnings cap and is down from 25% last week.