For a day there I thought the Twitter IPO might mark the exact top for at least the short term. However, the momentum of this market is very strong. I still believe, though, that we are on the cusp of a meaningful correction. Some of the sentiment indicators I look at actually got worse last week. Virtually everyone is bullish.
Estimates for both 2013 and 2014 remain in downtrends but the fact that I am shifting
weight from this year to next is allowing my first earnings indicator to remain positive.
Looking at earnings 52 weeks ahead, estimates are still in an upward trend as optimistic
analysts stay very positive.
With both earnings indicators positive, my maximum earnings exposure is 100%.
Looking at the gap between last twelve month earnings and future 52 week projections,
the gap remains large but it has stopped growing again.
There is no adjustment for this gap now since it is decreasing.
Total earnings factor exposure and maximum total exposure is therefore 100%, up from 75%
Odd lot investors are virtually the only group that is not wildly bullish. They remain neutral.
Exposure remains at 50%, same as last week.
Small option buyers remained very bullish last week.
Exposure remains at 5%, same as last week.
NAAIM managers continued to be very bullish last week and are still in extreme territory.
Exposure remains at -10% this week, same as last week.
When one of my sentiment indicators is maximum bearish and the other two are bearish or neutral, I assign a sentiment factor exposure of 0%.
Percentage of stock prices represented by net current assets increased last week.
Exposure increases to 20%, up from 0% last week.
Comparison of stock earnings yield to ten year treasury yield declined last week as interest rates increased.
Exposure declines to 30%, down from 50% last week.
Total valuation exposure is 25%, same as last week.
To combine these three factors, I multiply them together and then take the cube root.
This week, that number is 0%, same as last week.
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 are still positive.
I add 20% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq remained in negative position last week.
I subtract 25% to account for this factor.
Total technical adjustments this week are +5%, same as last week.
After adjustments, total exposure for the week is 5% or, after rounding, 0%.
This level of exposure does not exceed the current earnings cap and is the same as last week.
Richard Moore, CFA
With my wife in Hawaii