Volatility In My Model

 
1/6/2013 – This is getting pretty ridiculous. From week to week my model is swinging wildly from 0 exposure to 50%.  What is happening is that my sentiment factors are generally very negative but one of them is fluctuating from neutral to just slightly bullish.  When it is neutral, 
then the zero exposure comes into play, otherwise things don't look horrible. This is a very unusual circumstance that should shake itself out over time.  While this is occurring, the model is actually performing just fine.  50% invested in the bull move last week and zero percent invested in the bear move the previous week:

Earnings:
Earnings results continue to be in a declining  trend but forward 12 month estimates continue to move slightly higher.  There is  still a growing trend gap between future and past results so
this indicator is  negative and calls for zero exposure.  Twelve month forward earnings are still   nudging higher and are positive with 100% exposure.  Now I am looking at 2013  estimates for my third indicator and they are still trending higher and call for  100% exposure.
Total exposure from  the earnings factor is 67%, same as last week.
  
Sentiment:
Rydex leveraged fund investors continued quite  bullish but not to previous extremes.  Exposure from this indicator remains at  5%, same as last week.
Small option buyers followed the trend and bought lots of calls last week.  This brought their sentiment to neutral.  
Exposure decreased to 50%, down from 65% last week.
NAAIM managers continued to be very optimistic.  They are in extreme wildly bullish territory.
Exposure is -10% this week, same as last week.
When one of my sentiment factors is maximum bearish and the others are neutral or bearish, I set the exposure from this factor at 0% which is down from 20% last week.

Valuation:
Percentage of stock prices represented by net current assets stayed the same last week so exposure remains at 40%.
Comparison of stock earnings yield to ten year  treasury yield declined last week as interest rates increased.  Exposure is 30%  this week, down from 50% last week.
Total valuation exposure is 35%, down from 45%  last week.


To combine these three factors, I multiply them  together and then take the cube root.  Therefore, these three factors call for a  market exposure of 0%, down from 39% last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates stayed negative last week.  I subtract 10% to account for this. 
New highs - new lows on the Nasdaq stabilized and are still positive.  I add 20% to account for this factor.
Total technical adjustments this week are +10%,  same as last week.

After adjustments, total exposure for the
week  is 10% or, after rounding, 0% compared to 50% last week.
 
 
 

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