The market eked out a small gain last week as the discounting process continued. It seems to me that just about every possible positive for the economy in 2013 has been discounted. Most investor groups are extremely positive but it is always possible for them to get even more bullish. I am not afraid of the market running away, though. When the correction comes it should bring us back to levels seen a couple of weeks ago. At least.
Earnings results were a bit better last week but the gap between current earnings and future estimates continues to grow and this indicator is negative, calling for zero exposure.
Twelve month forward earnings are still trending higher, but just barely. Any estimate reduction will turn this indicator neutral or negative but it is still positive at this point with 100% exposure.
2013 estimates are my third indicator and they too continue just barely positive now and could go neutral next week. At this time, though, they are still trending higher and call for 100% exposure.
Total exposure from the earnings factor is 67%, same as last week.
Rydex leveraged fund investors got still more bullish last week and now this indicator has reached an extreme position again.
Exposure from this indicator is now at -10%, down from 5% last week.
Small option buyers remain confused and are neutral. In general, the put/call indicators are the only ones not looking very bearish.
Exposure remains at 50%, same as last week.
NAAIM managers continued to be very optimistic and my indicator has collapsed into record negative territory.
Exposure remains at -10% this week, the maximum bearish level.
When two of my sentiment indicators are maximum bearish and the other one is either bearish or neutral, I assign a sentiment factor exposure of -10%, down from 0% 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 remained the same last week.
Exposure remains at 20%, same as last week.
Total valuation exposure is still 20%, same as last week.
To combine these three factors, I multiply them together and then take the cube root. However, since my sentiment factor exposure is -10%, I assign a -10% overall exposure to the model this week, down from 0% 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 20% or, after rounding, 25%
compared to 25% last
Richard Moore, CFA
With my wife in Hawaii