THE EXPECTATION RATIO HITS A TWO YEAR HIGH
In a clear sign that this earnings season is blowing away expectations, our Expectation Ratio hit a new high today at 1.95. The components of the indicator are showing incredible strength across the board as revenues stabilize, margins expand and bottom line growth skyrockets higher. Of course, this is an intuitive and forward looking indicator which is compared to analysts estimates and expectations so it is a sign that we are in the middle of a very powerful earnings trend that is unlikely to whither before earnings season is over. The reality of the current earnings environment is that analysts are far too pessimistic about everything income statement related.
I would expect a substantial amount of catch-up in the next few weeks by the analyst community. That means price targets are going higher and stocks are getting upgraded. That likely means sideways to higher markets until earnings season comes to a close. As we mentioned before earnings season began, being long is the only option here. Short strategies and market neutral strategies should continue to perform poorly over the coming month.
I agree. And the Q3 GDP should really put icing on the cake. But I definitely think upside is limited for the year. We have like…10%-12% more upside from 1100 S&P for this year. That is tops in my opinion. I am still looking for an under 1000 S&P to be printed sometime after which is a pretty significant downtrend from 1200 in this market. I agree with you that shorting now isn’t the best strategy, and if you do, then don’t margin yourself, go all in, have a very short time frame and definitely don’t use options…
Can we please see how this expectation ratio tracks with the S&P over a longer period of time?
Here’s a two year chart. It’s a bit dated, but you can see the deterioration in the earnings environment pretty clearly…. http://pragcap.com/early-earnings-analysis
83% of companies beat so far.
one has to ask – what morons are doing research on companies, how do those highly educated analysts deserve their money?
i´m pretty sure analysts aren´t that dumb at all. they underestimate with a purpose, perhaps they were told to do so.
wall street was staring at the abyss.
and they know that the whole system (=their job) can only survive when you can manufacture a sustained rally.
major part of that game is to play with market expectations = keep estimates as low as possible.
i´m curious how long it will take until the market has finally figured that out.
look at the charts of all those hyped “blowout” earnings (AA, INTC, JPM …) and what happened to the days following the earnings release.
there is a pattern of “sell the spike” emerging.
i attribute that to
a)selling on news, since (smart) major participants weren´t surprised at all by those earnings beats.
b)HFT programs provide huge liquidity at the day of the surprise (remember: they make money by doing as much trades as possible). but the day after they withdraw in part from the stock and head over to the next hot earnings play.
speculative market participants who bought into the spike are suddenly confronted with much lower volume and have to sell to lower bids.