In the short run, things are looking up a bit. Reported 4th quarter earnings were actually pretty good and estimates for 2014 have held up reasonably well. First quarter weakness, to the extent there is any, will be blamed on the weather. So, in spite of poor sentiment and horrible valuation, my model has ratcheted up its exposure to 75% this week.
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 now the trend is just barely positive. The indicator is now positive again.
With both indicators positive, earnings exposure increases to 100%, up from 75% 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 increases to 100%, up from 75% last week.
Odd lot investors continued to short at a basically neutral level last week.
Exposure remains at 50%, same as last week.
Small option buyers continued to be moderately bullish last week and my 4 week moving average indicator stayed the same.
Exposure remains at 35%, same as last week.
NAAIM managers got more bullish again last week.
Exposure decreases to 20%, down from 35% last week.
My sentiment indicators deteriorated slightly last week as the market consolidated.
Sentiment exposure declines to 35%, down from 40% last week.
My long term valuation indicator remains negative as expected stock returns over the next 5-10 years
are the same as the level of the ten year treasury bond yield.
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 39%, up from 37% last week.
My comparison of yields on treasury bonds compared to lower quality corporates remained positive
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 turned positive last week.
There is, therefore, no adjustment for this factor.
Total technical adjustments this week are +30%, up from +5% last week.
After adjustments, total exposure for the week is 69% or, after rounding, 75%.
This level of exposure does not exceed the current earnings cap and is up from 50% last week.
Richard Moore, CFA
With my wife in Hawaii