My model has done well so far this year by avoiding the January decline and then participating in the the subsequent rally. Now, though, it is time to back away again as my sentiment indicators show small investors and speculators have almost reached universal bullishness again. I would not be at all surprised by some continuing upside price action but the low hanging fruit has been picked. Risk/reward ratios suggest increasing caution again.
Estimates for 2014 remain in a flattish trend. Most companies have reported earnings for 2013 and most have guided modestly higher for this year. This is not really a surprise and leaves my first earnings indicator just modestly positive.
Looking at earnings 52 weeks ahead, estimates have moved higher and the trend remains positive.
Therefore, this indicator is still 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 backed off on their shorting last week and are now just modestly bullish.
Exposure declines to 35%, down from 50% last week.
Small option buyers became more bullish last week as they increased the call buying again.
It wasn't enough to change the exposure level, though.
Exposure remains at 20%, same as last week.
NAAIM managers continued to get more bullish last week and have moved into extreme territory again.
Exposure decreases to -10%, down from 5% last week.
My sentiment indicators continued to deteriorate 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 down from 20% last week.
My long term valuation indicator remains negative as expected stock returns over the next 10 years
are now just barely above 2%.
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 also remained the same last week.
Exposure stays at 50%, same as last week.
Total valuation exposure is 17%, same as 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%, down from 35% 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 remained positive last week.
There is, therefore, no adjustment 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%.
This level of exposure does not exceed the current earnings cap and is down from 75% last week.
Richard Moore, CFA
With my wife in Hawaii