Here's Why Investors Should Ignore Earnings Season
Shattering the myth about earnings and the stock market
By Elliott Wave International[Note: The text version of the story is below.]
*********It's earnings season, and most investors are paying close attention (Reuters, Oct. 9):
"If there's something that can help the outlook for earnings, then it's going to be good news for the stock market. It is the most important variable," said [a] chief investment officer.
Strategists are watching whether earnings growth will sustain further gains in the market.But do corporate earnings really determine the stock market's trend? In a word, the answer is "no." Let's look at just one sample of the evidence from the February 2010 Elliott Wave Theorist:
The chart shows that in 1973-1974, earnings per share for S&P 500 companies soared for six quarters in a row, during which time the S&P suffered its largest decline since 1937-1942. This is not a small departure from the expected relationship; it is a history-making departure. Earnings soared, and stocks had their largest collapse for the entire period from 1938 through 2007, a 70-year span! Moreover, the S&P bottomed in early October 1974, and earnings per share then turned down for twelve straight months, just as the S&P turned up!
Hence, investors feel safe when corporate earnings are good. They are wary when earnings are bad. These sentiments make sense in an exogenous-cause world. But, as the Theorist has noted:
Financial market prices are not set in an exogenous-cause world. You don't buy stocks on record earnings; you buy them on bad earnings.
I recommend covering our short position at today's close. ... Our main job is to keep the money we have. If we exit now, we will do that.
Just 10 trading days later on March 9, 2009, the Dow Industrials bottomed and has since advanced about 177%.
That market call was based on the Wave Principle, not an exogenous factor like corporate earnings. Remember, the Dow Industrials started its years-long advance when corporations were reporting losses.
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