I've been racking my brain for several weeks now attempting to rationalize market strength in the face of a deteriorating earnings trend. Last week really hurt although I am persoanlly not in a net short position. Nevertheless, I've got to realize an error in my model that I think I now understand. I decided to modify my earnings outlook to exclude any company that would be influenced in a major way by fluctuations in commodity prices. I routinely do this when I am actually making purchase decisions for my portfolios. The industries eliminated were Agriculture, Mining, Fertilizer and (the big one) Energy. When I exclude these companies, I get a different and more positive picture of expectations for 2015 and I think this may be what the market is focusing on in order to exhibit strength. And it makes sense - the economy may not be affected much (or even affected positively) by commodity price changes. To incorporate this idea I have changed one of my earnings expectation indicators to reflect this modified S & P earnings trend. Things have not necessarily turned very bullish but my model is no longer short.
This year's earnings estimate trend (excluding commodity companies)- Positive
Earnings estimates 52 weeks out - Negative
Gap between future 52 week estimate and latest 12 month results - Neutral
Total earnings exposure and maximum total exposure under these conditions 50%
Equity put/call ratio +50%
Small investor put/call ratio +35%
NAAIM Manager cash position +20%
Average sentiment exposure this week +35%
Long term valuation 0%
Stock prices represented by net current assets 0%
Stock earnings yeild compared to ten year treasury yield +30%
Average valuation exposure this week +10%
Total exposure from above three factors +26%.
Comparison of Treasury Bond yields compared to lower quality corporate bond yields -10%
New highs minus new lows on the NASDAQ +20%
Trend indicator for new highs minus new lows 0%
Total technical adjustments +10%
Total stock exposure for the week +36%
Rounded to the nearest 25th percentile +25%.
Richard Moore, CFA
With my wife in Hawaii