9/16/2012 - I learned long ago that the market is always right. There is no point in objecting that the market shouldn't have done what it did. It is what it is. But I must confess the money-printing rally has me confused. To justify higher stock prices over time there are two factors to consider. Will corporate earnings be higher because of QE3? If so, we should see increases in earnings estimates. What about P/E multiples? I've heard an argument that, because of a reduction in uncertainty and additional monetary support, multiples should increase. Personally, though, with the government such a huge factor in the economic landscape, I would be looking for lower multiples - not higher. I have increased the model's emphasis on trend-following factors this week as an admission that I haven't been paying enough attention to market momentum but I'm still taking a very cautious approach here:
Earnings estimates for both 2012 and 2013 continue in a downtrend and last twelve month earnings are in a flat trend. My weighted number, though, continues to be in a positive trend.
Exposure remains the same this week at 100%.
Investors in the Rydex Funds continued to hold extremely bullish positions.
Exposure = -10%, maximum bearish position.
NAAIM investors backed off just a bit before the QE3 announcement and upped their cash
Exposure = 5%, up from -10% last week.
Small option buyers got even more bullish and remained in an extreme bullish posture.
Exposure = -10%, same as last week.
Total sentiment exposure is -5% this week, up from -10% last week. Two of my three sentiment indicators are still in maximum bearish position. They could get even more bearish, of course, but experience has taught me to be very cautious in this risky environment.
Percentage of value represented by net current assets stayed the same last week.
Exposure = 20%, same as last week.
Comparison of bond yields to stock earnings yields declined last week as interest rates increased and the market went up.
Exposure = 20%, down from 30% last week.
Total valuation factor exposure = 20%, down from 25% last week.
With two of my three sentiment factors at maximum negative I assign a total exposure
for these three factors of -10% this week. This is up from -20% last week.
The trend in high yield bonds compared to treasuries is still in an uptrend so I add 10%.
I continue to tinker with my model and, this week, I am recognizing that I haven't been paying enough attention to market momentum. So I am adding 20% when NH-NL is positive, as it is this week, instead of the previous 10%.
Total technical adjustments are +30% and exposure = 20%, up from 0% last week.
Two week moving average is 10%, same as last week.
Richard Moore, CFA
With my wife in Hawaii