We've Been Here Before

The major difference between this little downdraft in the major averages and previous examples is that this time the average small stock has gotten hit hard and is actually close to "correction" territory.  Sentiment has improved to neutral but technical factors are now bearish and they will keep exposure low unless the market declines much more.  The next few weeks should be very interesting.

Earnings:
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 remains at 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.

Sentiment:
The equity put/call ratio continued in a neutral position last week.
Exposure remains at 50%, same as last week.
Small option buyers have also backed away from their very optimistic call purchases.
Exposure increases to 35%, up from 20% last week.
NAAIM managers continued to increase their cash position.
Exposure increases to 50%, up from 20% last week.
Average sentiment exposure is 45% this week, up from 30% 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 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 39%, up from 33% last week.

Technicals:
My comparison of yields on treasury bonds compared to lower quality corporates remained in a
decline last week. In fact, the decline is accelerating.
I subtract 10% to account for this factor.
New highs - new lows on the Nasdaq stayed negative last week.
I subtract 10% to account for this factor.
My trend indicator for new highs - new lows on the Nasdaq is not operative now since the previous indicator is negative.
Total technical adjustments this week are -20%, same as last week.

After adjustments, total exposure for the week is 19% or, after rounding, 25%.
This level of exposure does not exceed the current earnings cap and is the same as last week.