It is starting to get interesting as the market weakness I have been anticipating is finally showing itself. I don't think this is about the "fiscal cliff." Ultimately, it's about earnings.
I've been struggling with how to account for the widening spread between last twelve month results that have been flat for a year and the future expectations that keep working slowly higher. I've come up with a percentage change between the two figures that currently is negative for stock prices and results in a zero exposure from this new indicator. Twelve
month forward earnings are still nudging higher and are positive with 100% exposure. My hybrid method that looks at this year's estimates and weights in 2013 in the second half is also positive and calls for 100% exposure.
Total exposure from the earnings factor is 67%.
Although finally showing some improvement, the Rydex investors are still overweighted in stocks. Exposure from this indicator remains at -10%.
Small option buyers have turned cautious. This is somewhat bullish for stocks and exposure is 65%, same as last week.
NAAIM managers have also started to moderate their bullishness. Exposure is 35% this week, up from 20% last week.
Total sentiment factor exposure is 30% this week, up from 25% last week.
Percentage of stock prices represented by net current assets stayed the same last week so exposure remains at 40%.
Comparison of stock earnings yield to ten year treasury yield has been improving as rates have declined and stock prices have sunk. Exposure is 80% this week, up from 70% last week.
Total valuation exposure is 60%, up from 55% last week.
To combine these three factors, I multiply them together and then take the cube root. Therefore, these three factors call for a market exposure of 49%, down from 52% last week.
My comparison of yields on treasury bonds compared to lower quality corporates has become flat and I now regard this indicator as neutral. Last week I was adding 10% but this week is a zero adjustment.
New highs - new lows on the Nasdaq has deteriorated further and remains negative. I subtract 10% to account for this.
Total technical adjustments this week are -10% and were 0% last week.
After adjustments, total exposure for the week is 39%, down from 52% last week.
Two week moving average is 46%, up from 31% last week.
Richard Moore, CFA
With my wife in Hawaii