Volatility has certainly picked up and some of the bulls are beginning to have second thoughts. My sentiment indicators have improved modestly as a result. I'm willing to take small net long positions at this point but it is way too early to get very optimistic. The character of any rally from here will be important to watch.
Estimates for 2014 remain in a flattish trend. More earnings reports and accompaning commentary are necessary before trends can be observed. For now, my first earnings indicator is still positive.
Looking at earnings 52 weeks ahead, estimates have now gone into a marginally negative trend. It is not a clear downtrend at this point so I am still calling this indicator neutral for the time being.
With one indicator positive and the other neutral, my maximum earnings exposure is 75%, same as last week.
Looking at the gap between last twelve month earnings and future 52 week projections,the gap has been shrinking and actually went significantly lower 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 75%, same as last week.
Odd lot investors became still more concerned last week and increased their shorting levels some more.
Exposure increases to 20%, up from 5% last week.
Small option buyers remain very bullish but have also backed off just a bit from their
previous wildly bullish stance.
Exposure remains at 5%, same as last week.
NAAIM managers got shook up last week and increased their cash position. They are still bullish but not extremely so.
Exposure increases to 5%, up from -10% last week.
My sentiment indicators continued to improve last week but they are still a long way from being bullish.
Sentiment exposure increases to 10%, up from 0% 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 20%, same as last week.
Comparison of stock earnings yield to ten year treasury yield remained the same last week.
Exposure remains at 70%, same as last week.
Total valuation exposure is 30%, 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 28%, up from 0% 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 remained in a negative position
I subtract 25% to account for this factor.
Total technical adjustments this week are +5%, same as last week.
After adjustments, total exposure for the week is 33% or, after rounding, 25%.
This level of exposure does not exceed the current earnings cap and is up from 0% last week.
Richard Moore, CFA
With my wife in Hawaii