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 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 .
Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
How News Are Interpreted by the Markets:
Same Day. Same Event. Same Market. Different Story!
"There is no group more subjective than conventional analysts." -- Robert Prechter.
February 23, 2010
By Vadim Pokhlebkin
Elliott wavers sometimes hear the criticism that patterns in market charts can be "open to interpretation." For example, what looks like a finished 1-2-3 correction to one analyst, another analyst may interpret as 1-2-3 of a developing impulse, with waves 4 and 5 on the way.
Does this happen? Absolutely. (Although, there are always tools an Elliottician can employ to firm up the wave count.) But here's the real question: What's the alternative?
Typical alternatives amount to analysis of the "fundamentals": Jobs, interest rates, CPI, PPI, what Ben Bernanke said on Tuesday -- it all goes into the pot. Result? Well, if you think it's clear and unambiguous, guess again. Here's a fresh example.
Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.
On the evening of February 18, in a surprise move, the Federal Reserve raised its discount rate -- the interest rate at which it lends money to banks. The next morning the S&P futures were pointing lower; everyone was bracing for a weak day -- because, as conventional thinking goes, higher interest rates are bad for business, the economy, and ultimately for the stock market. Friday morning, stocks indeed opened lower and major news headlines confirmed:
- Wall St opens weaker after Fed move
- ... Investors Wary After Fed Move
- Stocks Open Lower After Surprise Fed Move
But around 11am that same morning, the DJIA turned around and moved higher. Now look at what the headlines from major sources were saying after lunch on February 19:
- US stocks bounce back; Fed move viewed in positive light
- US Stocks Up A Bit On Fed Discount Rate Increase
- Stocks Higher After Fed Move
What was a "bearish move" by the Fed in the morning morphed into a "bullish" one by the afternoon! Same event. Same market. Same day. Completely opposite interpretation!
This brings to mind the answer EWI's President Robert Prechter once gave when asked about the objectivity of Elliott wave analysis. Bob said:
"I always ask, 'compared to what?' There is no group more subjective than conventional analysts who look at the same 'fundamental' news event -- a war, the level of interest rates, the P/E ratio, GDP reports, you name it -- and come up with countless opposing conclusions. They generally don’t even bother to study the data. Show me a forecasting method that is totally objective or contains no human interpretation. There is no such thing, even in a black box. To answer your question more specifically, though, properly there should be no subjectivity in interpreting Elliott waves patterns. There is a set of rules and guidelines for that interpretation. Interpretation gives you only the most probable scenario(s), not a sure one. But people mislabel probabilistic forecasting as subjectivity. And subjectivity or bias can ruin that value, just as in any other approach. Sometimes we screw up. But in contrast to the outrageously improbable (if not downright false) wave interpretations or other types of forecasts we often see from others, we are as close to an objective service as you’re going to find. We hire analysts who know the rules of Elliott cold."
Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.
Vadim Pokhlebkin joined Robert Prechter's Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor's in Business from Bryan College, where he got his first introduction to the ideas of free market and investors' irrational collective behavior. Vadim's articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people's collective investment decisions.
|
