Stocks have been on a tear as investors price in a very strong earnings season for Q1, but how much of this is actually in the market already? David Rosenberg notes that stocks are unlikely to continue their rally based on the high levels of optimism and low negative preannouncements:
“Finally, Q1 earnings season kicks off today with Alcoa after the bell. There is a nifty little article on page C1 of the WSJ which notes that when we head into quarters with tremendous optimism and a very low negative earnings preannouncement ratio like we have now (1.3x versus the long-turn norm of 2.1x), the equity market struggles in the first month of the reporting season as either the results do not live up to their billing or they do and a round of profit-taking takes hold. When negative pre-announcements are low, the S&P 500 is down 1% on average the first month of the reporting quarter. When pessimism is high and the negative pre-announcement ratio is above-normal, the market rallies an average of 2.1%.”
Source: Gluskin Sheff
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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