Something Brewing

 We seem to be on the verge of a meaningful move in the stock market but it is unclear which way the move will go.  The average stock continues to underperform the big averages (in my portfolio, too) and valuation is very negative.  But earnings continue to come through pretty well and sentiment measures are mixed.  They say discretion is the better part of valor so I am continuing with some exposure but ready to move one way or the other depending on my indicators.

Earnings:
Estimates for 2014 are in a modestly increasing trend and last week's numbers were good.  As long as this continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates have also increased slowly and the trend remains positive.
With both indicators positive, earnings exposure remains at 100%, same as last week.
Looking at the gap between last twelve month earnings and future 52 week projections, all of a sudden the gap has reached negative levels and that gap is now increasing.
The large and widening gap dictates a reduction in the earnings factor by 25%.
Total earnings factor exposure and maximum total exposure declines to 75%, down from 100% last week.
 
Sentiment:
The equity put/call ratio remains low but it increased marginally last week.  
Exposure increases to 20%, up from 5% last week.
Small option buyers have definitely gotten more fearful and have increased their put buying.
Exposure remains at 65%, same as last week.
NAAIM managers flipped again and started putting money to work in the market again.
Exposure decreases to 5%, down from 20% last week.
Average exposure from sentiment factors is 30% this week, same as last week.

Valuation:
My long term valuation indicator remains negative as expected stock returns over the next 10 years 
are still below the yield on the ten year treasury. 
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 0%, same as last week.
Comparison of stock earnings yield to ten year treasury yield remained unchanged last week.
Exposure remains at 50%, same as last week.
Total valuation exposure is 17%, 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 34%, down from 37% last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates remained 
positive last week.
I add 10% to account for this factor.
New highs - new lows on the Nasdaq returned to a neutral position last week.
I add 0% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is not operative when NH-NL is neutral or negative.
Total technical adjustments this week are +10%, up from +5% last week.

After adjustments, total exposure for the week is 44% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and is the same as last week.

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