be_ixf;ym_201910 d_16; ct_50

Select Page

The Party’s Just Getting Started

The Party’s Just Getting Started

With more than 70% of the companies in the S&P 500 reporting for the fourth quarter, earnings are, to use the technical term, fantastic.

I realize that’s not a precise analysis, so let’s look at the numbers. Earnings per share (EPS) for the companies in the S&P 500 are up 46% compared to the fourth quarter of 2015. This confirms the end of the earnings recession of the past five quarters, when the year-over-year (YOY) change in EPS was negative.

Since earnings drive the stock market, it’s easy to understand why stocks moved sideways for almost a year and a half before surging higher in November. History tells us that more gains are likely.

The chart shows the YOY changes in EPS in percentage terms. A horizontal line is drawn at zero, and the blue line shows the wild swings in earnings that are common.

 

With more than 70% of the companies in the S&P 500 reporting for the fourth quarter, earnings are, to use the technical term, fantastic.

 

The raw data can be difficult to read, so I’ve applied a smoothing technique in the next chart to reduce the impact of the big swings.

 

With more than 70% of the companies in the S&P 500 reporting for the fourth quarter, earnings are, to use the technical term, fantastic.

 

In this chart, extreme points are replaced by an average of the previous and subsequent data. Now a clear pattern emerges, and the recent earnings recession is visible.

Remember that earnings drive the market. When EPS growth shifts from negative to positive, we’re usually at the beginning of a bull market. This happened in 1992 as the market began a string of double-digit annual gains that ended in the Internet bubble, and in 2003 after the bubble crashed.

Earnings data confirms that the price move we’ve seen since November is likely to carry prices higher for months. There will be pullbacks along the way, but we should be looking to buy the dips to benefit from the new bull market.

Regards,

Michael Carr, CMT

About The Author

Michael Carr, CMT, CFTe

Michael Carr is an American investor, a Chartered Market Technician (CMT) and a contributing editor for Sovereign Investor Daily. He is a longtime member of the Market Technicians Association (MTA), where he serves as the editor of its newsletter, “Technically Speaking.” He is also a contributor to various publications related to trading, including the Journal of Technical Analysis, MoneyShow, SFO Magazine and Futures Magazine. Michael is the author of two books, Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing (2008) and Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends (2010).

MEET OUR EXPERTS

WHAT READERS ARE SAYING..

I am up $20,070 in closed positions from Feb. 18 through March 7.

- Bob Rowe

I started your system in December … I am ahead $29,000 … I put total faith in you and your system and it has worked for me very nicely. Thanks again I sure like your humble approach about this whole thing

- Dale Leiffer

I have made a little over $4,000 while being cautious.

- Chuck Goss

Share This