If I had to guess, I think the rally of the last four weeks will be reversed soon and very quickly. But that would just be an educated guess - my model still calls for some exposure based on the strong momentum:
Earnings results continue to be flat to down as they are reported. The gap between last twelve
month results and future twelve month expectations is still more than 28% and it continues to grow.
This indicator continues to suggest 0% exposure this week.
Twelve month forward earnings are still trending higher as analysts obviously think things will improve during the first quarter of 2014.
This indicator is still positive at this point with 100% exposure.
2013 estimates are my third indicator and they are now showing a basically flat trend as analysts have stopped raising their estimates for 2013.
This indicator is now neutral and calls for 50% exposure, down from 100% last week.
Total exposure from the earnings factor is 50%, down from 67% last week.
I have decided to change one of my sentiment indicators this week. Rydex Fund investors have become less and less useful as index ETFs have become more popular. Therefore, the indicator has lost much of its timliness. Instead, I am going to use odd lot short sales compared to odd lot purchases. As it turns out, this indicator is just as bearish as the Rydex Fund indicator was. Odd lot investors have cut back their shorting substantially.
Exposure from this indicator starts at -10%, same as last week for my Rydex Fund indicator.
Small option buyers continued to move to a more bullish position. They remain at a neutral sentiment level.
Exposure stays at 50%, same as last week.
NAAIM managers continued to move to a more bullish stance but still not at extreme levels.
Exposure remains at 5% this week, same as last week.
When one of my sentiment indicators is maximum bearish and the other two are neutral or negative, I assign a sentiment factor of 0%, same as last week.
Percentage of stock prices represented by net current assets remained the same last week so
exposure continues at 20%, same as last week.
Comparison of stock earnings yield to ten year treasury yield declined again last week.
Exposure declines to 20%, down from 30% last
Total valuation exposure is 20%, down from 25% last week.
To combine these three factors, I multiply them together and then take the cube root. This
week, that number remains at 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.
Total technical adjustments this week are +30%, same as last week.
After adjustments, total exposure for the week is 30% or, after rounding, 25% compared to 25% last
I will be traveling for the next couple of weeks so I probably won't be able to post extensive analysis. I will try to post a short note if there are any significant changes in the outlook.
Richard Moore, CFA
With my wife in Hawaii