Last week will be remembered as the week the short sellers threw in the towel. There were large outflows from the SH (inverse SPY) ETF and an indicator I watch comparing odd lot short sales to odd lot purchases showed the lowest weekly short sale reading in the last two years (the length of the data available). This negative data continues to be counter-balanced by the continuing positive readings of the trend-following indicators like NH-NL. It seems like we are building to some sort of climax but it remains hard to pinpoint when it will occur. I want to be cautious and ready to abandon ship at the slightest provocation:
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 that are again
near record levels.
Exposure = -10%, maximum bearish position.
NAAIM investors turned more bullish again but not enough to change exposure levels.
Exposure = 5%, same as 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 remains at -5% this 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 increased last week.
Exposure = 40%, up from 20% last week.
Comparison of bond yields to stock earnings yields increased last week as interest rates declined. Exposure = 30%, up from 20% last week.
Total valuation factor exposure = 35%, up from 20% 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 the same as last week.
The trend in high yield bonds compared to treasuries is still in a very slight uptrend so I add 10%.
I add 20% when NH-NL is positive as it remains currently.
Total technical adjustments are
+30% and exposure = 20%, same as last week.
Two week moving average is
20%, up from 10% last week.
Richard Moore, CFA
With my wife in Hawaii