The ability of the market to gyrate wildly and get to new highs on the S & P 500 is truly spectacular. The pattern of lower lows and higher highs, though, is indicative of instability. Technical factors in my model have improved but everything else got worse last week. Nevertheless, the momentum should carry the market somewhat higher in the very short term. Earnings expectations will be the key factor going forward.
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 have reversed and are now just marginally negative. This indicator is now rated neutral, a reduction from positive last week.
With one indicator positive and the other neutral, the earnings indicator is now at 75%, down from 100% 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 declines to 75%, down from 100% last week.
The equity put/call ratio declined somewhat last week as call buying picked up again.
Exposure declines to 65%, down from 80% last week.
Small option buyers have remained in a neutral position.
Exposure remains at 50%, same as last week.
NAAIM managers stampeded back into stocks last week at the fastest rate since I have been watching this indicator.
Exposure declines to 35% this week, down from 95% last week.
Average sentiment exposure is 50% this week, down from 75% last week.
My long term valuation indicator remains negative as expected stock returns over the next 10 years are now back below 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 0%, same as last week.
Comparison of stock earnings yield to ten year treasury yield declined last week.
Exposure declines to 50%, down from 70% last week.
Total valuation exposure is 17%, down from 23% 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 40%, down from 56% last week.
My comparison of yields on treasury bonds compared to lower quality corporates remained in a
decline last week.
I subtract 10% to account for this factor.
New highs - new lows on the Nasdaq turned back positive last week.
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is also positive so no further adjustment is needed.
Total technical adjustments this week are +10%, up from -20% last week.
After adjustments, total exposure for the week is 50% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and is up from 25% last week.
Richard Moore, CFA
With my wife in Hawaii