Based on past experience, we know that international conflict can create increased volatility. We also know that, unless the economy is impacted in a direct way, the market will usually come through the uncertainty without being severely impacted. So, my model continues to evaluate the same old indicators and, at least for this week, nothing much has changed.
Estimates for 2014 remain in a flattish trend. Most companies have reported earnings for 2013 and most have guided modestly higher for this year. This is not really a surprise and leaves my
first earnings indicator just modestly positive.
Looking at earnings 52 weeks ahead, estimates have moved higher and the trend remains just barely positive.
Therefore, this indicator is still 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,the gap has been shrinking and continued to shrink last week.
There is no adjustment for this gap now since it is smaller and decreasing.
Total earnings factor exposure and maximum total exposure remains at 100%, same as last week.
Odd lot investors continued to short at a basically neutral level last week.
Exposure remains at 50%, same as last week.
Small option buyers became more bullish last week as they increased the call buying again.
Exposure declines to 20%, down from 35% last week.
NAAIM managers continued to get more bullish last week and are now close to extreme territory.
Exposure decreases to 5%, down from 20% last week.
My sentiment indicators continued to deteriorate last week. It is very possible that next week's readings could force sentiment to 0 exposure.
Sentiment exposure declines to 25%, down from 35% last week.
My long term valuation indicator remains negative as expected stock returns over the next 5-10 years
are below the level of the ten year treasury bond yield.
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 also 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 35%, down from 39% last week.
My comparison of yields on treasury bonds compared to lower quality corporates remained positive
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 positive last week.
There is, therefore, no adjustment for this factor.
Total technical adjustments this week are +30%, same as last week.
After adjustments, total exposure for the week is 65% or, after rounding, 75%.
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