The market's momentum continued to push the major averages higher last week but, once again, divergences were present as the Russell 2000 was down for the week. Not much really changed last week - two of my three sentiment indicators got more bearish but the third one climbed out of the cellar and caused a 25% stock position to be recommended by my model. Caution is still the watchword here.
I am adding in 2015 earnings expectations now that we are in the final half of the year. This
weighted estimate for 2014-2015 is still in an uptrend although estimate reductions could change that.
As long as the uptrend continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates have reversed and are still marginally negative. This indicator is still rated neutral.
With one indicator positive and the other neutral, the earnings indicator remains at 75%, the same as last week..
Looking at the gap between last twelve month earnings and future 52 week projections, the gap remains at negative levels but the gap is no longer increasing.
The shrinking gap means that there is no adjustment to be factored in.
Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.
The equity put/call ratio declined some more last week as put buying is drying up.
Exposure declines to 20%, down from 35% last week.
Small option buyers have also become much more positive and stopped buying puts.
Exposure declines to 5%, down from 20% last week.
NAAIM managers increased their cash position just marginally last week but it was enough to move my indicator out of the extreme bearish category.
Exposure increases to 5% this week, up from -10% last week.
Average sentiment exposure is 10% this week. This is up from 0% last week.
My long term valuation indicator remains negative as expected stock returns over the next 10 years are now back below the yield on the ten year treasury bond and are now back below 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 20%, same as last week.
Comparison of stock earnings yield to ten year treasury yield remained the same last week.
Exposure remains at 50%, same as last week.
Total valuation exposure is 23%, 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 26%, up from 0% last week.
My comparison of yields on treasury bonds compared to lower quality corporates remained in a
decline last week.
I subtract 10% to account for this factor.
New highs - new lows on the Nasdaq stayed positive last week.
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is not operative now since it is also positive.
Total technical adjustments this week are +10%, same as last week.
After adjustments, total exposure for the week is 36% or, after rounding, 25%.
This level of exposure does not exceed the current earnings cap and is up from 0% last week.
This week the top five ranked stocks used in my aggressive screen are still: AMOT, LDL, STRT, PLOW and CSCD.
Richard Moore, CFA
With my wife in Hawaii