Sentiment started to improve before the big rally Thursday but I'm afraid it will not last long. Meanwhile, earnings look poised for a fall given the huge number of companies lowering expectations and the impact of the shutdown. I am still taking a neutral approach for now but I would anticipate more market volatility:
Estimates for 2013/2014 seem to have stalled but remain in a positive trend.
Looking at earnings 52 weeks ahead, estimates are still in an upward trend as optimistic analysts stay very positive.
With both earnings indicators positive, my maximum earnings exposure is 100%.
Looking at the gap between last twelve month earnings and future 52 week projections, the gap is very large and is now on the verge of starting to grow again. It is still marginally narrowing this week, though.
There is no adjustment for the earnings gap so the earnings factor exposure is 100%, the same as last
Odd lot investors started shorting a bit more last week and are now neutral.
Exposure increases to 50%, up from 35% last week.
Small option buyers continued to buy calls at a pretty high level, but not extreme.
Exposure remains at 20%, same as last week.
NAAIM managers got more defensive last week.
Exposure increases to 20% this week, up from 5% last week.
The sentiment factor increases to 35% this week, up from 20% last week.
Percentage of stock prices represented by net current assets remains at the lowest level possible.
Exposure remains at 0%, same as last week.
Comparison of stock earnings yield to ten year treasury yield remained neutral last week.
Exposure remains at 50%, same as last week.
Total valuation exposure is 25%, same as last week.
To combine these three factors, I multiply them together and then take the cube root.
This week, that number is 44%, up from 37% 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 negative last week in spite of the big rally.
I subtract 25% from my exposure to account for this factor.
Total technical adjustments this week are +5%, same as last week.
After adjustments, total exposure for the week is 49% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and is the same as last week.
Richard Moore, CFA
With my wife in Hawaii