THE EXPECTATION RATIO REMAINS CONSTRUCTIVE DESPITE RECENT DECLINE
by ilene - November 17th, 2009 12:45 pm
The Pragmatic Capitalists belief the market cannot be shorted yet even though we are in a secular bear market. Here’s why. – Ilene
THE EXPECTATION RATIO REMAINS CONSTRUCTIVE DESPITE RECENT DECLINE
Courtesy of The Pragmatic Capitalist
What a curious market we are confronted with. It’s now quite clear that the rally is living on the liquidity based fuel from the Fed and the declining dollar. In terms of valuations, the market appears fully valued if not overvalued. It’s also quite clear, based on GDP, retail sales and the ISM data, that the economy is rebounding off the deep trough of Q1 2009 in what has to be one of the greatest mean reversions of all time. From a technical perspective the market is in a robust uptrend. Most importantly, we are in the midst of an expectations & earnings recovery.
So, while the rally appears to be ahead of the fundamentals, a confluence of positive momentum, upside data surprises and very negative earnings expectations continue to provide support to the
Ever since our March 8th bottom call, I have maintained that the market could not be shorted. This was almost entirely due to the surging expectation ratio. Earnings and expectations drive stocks. With a rebound in earnings and an analyst community that saw no such thing it was clear to us that you couldn’t bet against the earnings trend (regardless of how weak the real underlying fundamentals of the economy were and are). With over 70% of companies outperforming analyst expectations it is practically impossible for the ratio to accelerate much higher. The analysts simply can’t be more wrong (see below). With that said, the current reading of 1.75 on the ER is still extremely high and represents an environment where analysts still have a great deal…