I'm going back to a fully hedged position because sentiment factors did not improve last week in spite of the weak stock market performance. While there is no evidence that a new bear market is beginning, there is certainly the possibility of a sharp correction in the short run. Caution is advised until my indicators improve.
Estimates for 2014 are in a modestly increasing trend. 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.
There is no adjustment for this gap now since it is smaller and decreasing.
Total earnings factor exposure and maximum total exposure remains at 100%, same as last week.
Odd lot investors adopted a conservative stance last week and increased their shorting somewhat. They have gone back to a neutral posture.
Exposure increases to 50%, up from 35% last week.
Small option buyers got more concerned as the market declined last week.
It wasn't enough to change the exposure level, though.
Exposure remains at 20%, same as last week.
NAAIM managers continued to hold their essentially fully invested position last week.
Exposure remains at -10%, same as last week.
When one of my sentiment indicators is maximum bearish and the other two are negative or neutral, I assign an exposure level of 0%. This is the same as last week.
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 increased last week as the market declined and interest rates also worked lower.
Exposure increases to 70%, up from 50% last week.
Total valuation exposure is 23%, up from 17% 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 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.
My trend indicator for new highs - new lows on the Nasdaq turned negative 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 25% last week.
Richard Moore, CFA
With my wife in Hawaii