It was another "feel good" week as the S & P 500 hit more new highs above the 2000 mark. Technical factors remain strong with the exception of the performance of high yield bond funds compared to Treasury bonds. The rally in Treasury bonds has not been duplicated by high yield funds. Why are investors willing to push stock prices higher but not junk bond prices? My model is holding at 50% exposure but it would only take one more strong week to push sentiment factors negative as they have been for much of this year.
I am adding in 2015 earnings expectations now that we are in the final half of the year. This
weighted estimate for 2014-2015 is still in an uptrend.
As long as this continues, my first earnings indicator is positive.
Looking at earnings 52 weeks ahead, estimates are also in a clear uptrend.
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, the
gap has reached negative levels and that gap is increasing.
The large and widening gap dictates a reduction in the earnings factor by 25%.
Total earnings factor exposure and maximum total exposure remains at 75%, same as last week.
The equity put/call ratio continues to decline as option buyers get more aggressive.
Exposure declines to 35%, down from 50% last week.
Small option buyers also continue to take a bullish view of this market.
Exposure remains at 20%, same as last week.
NAAIM managers quickly put money to work last week.
Exposure declines to 20%, down from 50% last week.
Average sentiment exposure this week is 25%, down from 40% last week.
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 and are now back below 2%.
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 the same last week.
Exposure stays 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 31%, down from 37% last week.
My comparison of yields on treasury bonds compared to lower quality corporates remained in a
decline last week.
I subtract 10% to account for this factor.
New highs - new lows on the Nasdaq remained positive last week.
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is also positive and requires no adjustment.
Total technical adjustments this week are +10%, same as last week.
After adjustments, total exposure for the week is 41% or, after rounding, 50%.
This level of exposure does not exceed the current earnings cap and the same as last week.
Richard Moore, CFA
With my wife in Hawaii