Improving Outlook If Earnings Can Continue To Advance

Last week's volatility definitely shook some investors up.  My sentiment indicators have become more bullish than any time since mid 2011.  That is a good thing but longer term valuation is still a problem and earnings estimates for 2014 and 2015 were both reduced significantly last week.  Nevertheless, my model has improved enough to move stock exposure up a notch to 50%.  If we do get a rally, it will be important to watch sentiment closely to see how fast small investors and speculators turn bullish again.

Earnings:
I am adding in 2015 earnings expectations now that we are in the final half of the year. This
weighted estimate for 2014-2015 is still in an uptrend although estimate reductions could change that.
As long as the uptrend continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates are also in  an uptrend but looking like they could reverse.
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 remains at negative levels but the gap is no longer increasing.
The shrinking gap means that there is no adjustment to be factored in.
Total earnings factor exposure and maximum total exposure increases to 100%, up from 75%  last week.

Sentiment:
The equity put/call ratio improved last week.
Exposure increases to 80%, up from 65% last week.
Small option buyers have also backed away from their very optimistic call purchases.
Exposure remains at 50%, same as last week.
NAAIM managers continued to increase their cash position.
Exposure increases to 95%, up from 80% last week.
Average sentiment exposure is 75% this week, up from 65% last week.

Valuation:
My long term valuation indicator remains negative as expected stock returns over the next 10 years are just barely above the yield on the ten year treasury bond.
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 20%, same as last week.
Comparison of stock earnings yield to ten year treasury yield continued to increase last week.
Exposure increases to 90%, up from 80% last week.
Total valuation exposure is 37%, up from 33% 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 65%, up from 54% last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates remained in a
decline last week. In fact, the decline is accelerating.
I subtract 10% to account for this factor.
New highs - new lows on the Nasdaq stayed negative last week.
I subtract 10% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is not operative now since the previous indicator is negative.
Total technical adjustments this week are -20%, same as last week.

After adjustments, total exposure for the week is 45% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and is up from 25% last week.