Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investors Why Do You Keep Doing This To Yourself?

Stock-Markets / Stock Market 2017 Dec 11, 2017 - 08:37 AM GMT

By: Avi_Gilburt

Stock-Markets

As I am known to do, I will peruse articles on the web to find some interesting tidbits. And, I found one in one of Lance Robert’s recent posts.

Within this article, he cited a Doug Kass note, which stated:

“Despite many who are suggesting this has been a 'rational rise' due to strong earnings growth, that is simply not the case as shown below . . . Since 2014, the stock market has risen (capital appreciation only) by 35% while reported earnings growth has risen by a whopping 2%. A 2% growth in earnings over the last 3-years hardly justifies a 33% premium over earnings.


Of course, even reported earnings is somewhat misleading due to the heavy use of share repurchases to artificially inflate reported earnings on a per share basis. However, corporate profits after tax give us a better idea of what profits actually were since that is the amount left over after those taxes were paid.

"Again we see the same picture of a 32% premium over a 3% cumulative growth in corporate profits after tax. There is little justification to be found to support the idea that earnings growth is the main driver behind asset prices currently.
We can also use the data above to construct a valuation measure of price divided by corporate profits after tax. As with all valuation measures we have discussed as of late, and forward return expectations from such levels, the P/CPATAX ratio just hit the second highest level in history."

So, what is Lance’s conclusion from the Kass note? “The reality, of course, is that investors are simply chasing asset prices higher as exuberance overtakes logic.”

And, all of this leaves me scratching my head.

First, Kass almost came to a logical conclusion when he noted that “[t]here is little justification to be found to support the idea that earnings growth is the main driver behind asset prices currently.”

But, he missed the boat when he added that last word “currently.” He would have been 100% accurate if he had simply noted his conclusion without that last word. If earnings are only lining up with market direction part of the time, then it is clear that earnings are only a coincidental factor during those times rather than the driving factor.

You see, if something does not drive the market all the time, how can you assume it is really a causative factor rather than a coincidental factor during the minority of the time it is in alignment with a market move? Even if it aligns 60% of the time, it is still a coincidental factor rather than a causative factor. To state otherwise is simply not accurate. I mean, either the steering wheel directs the car all the time or it does not.

Now, let’s deal with Lance’s conclusion. Lance’s conclusion presupposes that “logic” is what normally drives the market. So, if exuberance is taking over logic, clearly he views logic as the primary and predominant force driving the market the majority of the time. Now, let me ask you this: when was the last time you sought out the services of a logician to determine the market’s next move?

And, I am quite sure I know your answer to the question I just posed. Now, do you know why you don’t seek out the services of a logician to determine the market’s next move? Yup. You guessed it. Because logicians would never be able to provide you with consistent correct responses because markets are not driven by logic. Rather, the market is driven by investor sentiment ALL the time (i.e. emotion), as compared to the erroneous belief that it is being driven by some coincidental factor, such as earnings, some of the time. But, I do have to give some credit to Doug and Lance for at least recognizing that truth about the market.

So, I wanted to share this example of how pervasively wrong Wall Street or analyst thinking really is. Moreover, this is the type of wrong thinking that is continually propagated throughout what is purported to be “analytical” writing.

I am quite certain you have read dozens, if not hundreds, of articles outlining for you what supposedly “matters” to the market, such as earnings. Yet, the market does not seem believe any of it really matters. If it did, do you think Amazon (NASDAQ:AMZN) would see the stock price we see today?

I sincerely hope that my articles at least open your mind to see through how most of the market thinks, and why it is often the wrong way to look at markets, despite it sounding so “logical.”

Price pattern sentiment indications and upcoming expectations

There comes a point in time when we have a completed pattern that we have to become much more cautious of upside during a bull market. But, at the same time, we have to respect the fact that bull markets love to extend beyond our standard targeting.

At this time, the SPX has now exceeded the target we set back in 2015 by approximately 2%. Yet, it is still possible it can extend a bit more. And, the main reason is that the Nasdaq pattern still does not look complete. In fact, it still looks like it needs one more rally to complete its structure. And, for this reason, I am still looking a bit higher into the end of the year, especially in the NQ, before the larger degree pullback I want to see in the equity market takes hold.

But, even though I am still on alert for a larger degree pullback in the market, please remember that the larger picture suggests that the SPX will likely see levels exceeding the 3000 region in the coming years before a major bear market takes hold. In fact, depending upon how long the impending pullback I expect in the market takes us, I think we can even strike or exceed the 2800SPX region in late 2018.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

© 2017 Copyright Avi Gilburt - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in