Saturday, October 24, 2009

Vadim Pokhlebkin with Elliott Wave International on Earnings



Earnings: Is That REALLY What's Driving The DJIA Higher? The idea of earnings driving the broad stock market is a myth.
October 22, 2009
By Vadim Pokhlebkin


It's corporate earnings season again, and everywhere you turn, analysts talk about the influence of earnings on the broad stock market:

US Stocks Surge On Data, 3Q Earnings From JPMorgan, Intel (Wall Street Journal)
Stocks Open Down on J&J Earnings (Washington Post)
European Stocks Surge; US Earnings Lift Mood (Wall Street Journal)
With so much emphasis on earnings, this may come as a shock: The idea of earnings driving the broad stock market is a myth.

When making a statement like that, you'd better have proof. Robert Prechter, EWI's founder and CEO, presented some of it in his 1999 Wave Principle of Human Social Behavior (excerpt; italics added):

Are stocks driven by corporate earnings? In June 1991, The Wall Street Journal reported on a study by Goldman Sachs’s Barrie Wigmore, who found that “only 35% of stock price growth [in the 1980s] can be attributed to earnings and interest rates.” Wigmore concludes that all the rest is due simply to changing social attitudes toward holding stocks. Says the Journal, “[This] may have just blown a hole through this most cherished of Wall Street convictions.”

What about simply the trend of earnings vs. the stock market? Well, since 1932, corporate profits have been down in 19 years. The Dow rose in 14 of those years. In 1973-74, the Dow fell 46% while earnings rose 47%. 12-month earnings peaked at the bear market low. Earnings do not drive stocks.

And in 2004, EWI's monthly Elliott Wave Financial Forecast added this chart [shown above] and comment:

Earnings don’t drive stock prices. We’ve said it a thousand times and showed the history that proves the point time and again. But that’s not to say earnings don’t matter. When earnings give investors a rising sense of confidence, they can be a powerful backdrop for a downturn in stock prices. This was certainly true in 2000, as the chart shows. Peak earnings coincided with the stock market’s all-time high and stayed strong right through the third quarter before finally succumbing to the bear market in stock prices. Investors who bought stocks based on strong earnings (and the trend of higher earnings) got killed.

So if earnings don't drive the stock market's broad trend, what does? The Elliott Wave Principle says that what shapes stock market trends is how investors collectively feel about the future. Investors' mood -- or social mood -- changes before "the fundamentals" reflect that change, which is why trying to predict the markets by following the earnings reports and other "fundamentals" will often leave you puzzled. The chart above makes that clear.

Get Your FREE 8-Lesson "Conquer the Crash Collection" Now! You'll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more. Learn more and get your free 8 lessons here: http://www.elliottwave.com/club/protect-yourself.aspx?code=27741

2 comments:

adan said...

ew has great stuff don't they? seems i'm often learning of something i'd taken for granted being not quite i thought ;-)

another good example, i think from stu issue, was how the amount of money on the sidelines, which i must have heard 20 times AGAIN on fast money this friday was gonna fire the stock market even higher FOR SURE, is also a myth -

ew had a chart showing how money "on the sidelines" actually increased as the huge market run up in the 90's occurred!

anyway, glad posted vadim's article - thanks!

Todd said...

Thanks for the comments, Adan. Yes, EWI has been great during this crash and has helped signifivantly with my rading decisions and has saved my family members and friends a lot of money in their retirement by being ahead of the market.

They are a great tool for the average investor because they have a lot of free educational tools and articles, and their subscription services are very decently priced to where almost anyone can join. The value is great.

Todd

StatCounter