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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (26305)	4/23/2000 10:00:00 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 71038

nytimes.com "With many equity strategists reiterating their belief that the companies in the Standard & Poor's 500 will earn 20 percent more on average this year than they did in 1999, investors regained some confidence that stocks will once again produce the double-digit gains they have come to love. While this seems an admirably sensible approach -- how quaint to base an investment decision on something real, like a stock's earnings! -- it may not produce the results that investors are hoping for. Because market history teaches that when earnings growth is hottest, gains in stocks are disappointingly cool. Statisticians at Ned Davis Research, an investment firm in Venice, Fla., have gone back to 1927, studying how stock prices react to earnings increases and declines. Here are their findings: When earnings growth in the S&P 500 stocks exceeded 20 percent, as is expected this year, the index has historically gained an average of 1.2 percent. When earnings are rising 10 percent to 20 percent, the S&P typically rises 6.2 percent. The real gains for stocks come when corporate earnings growth is slow or nonexistent. For example, the S&P 500 gained on average 9.7 percent during times when earnings growth was rising less than 10 percent or when overall profits actually registered as much as a 10 percent decline. And when S&P earnings fell steeply -- 10 percent to 25 percent -- the index gained an astonishing 28.7 percent. "This generally just shows that from a long-term perspective strong earnings growth in and of itself is not that bullish," said Tim Hayes, global equity strategist at Ned Davis Research. But that finding is less counterintuitive than it might seem. "The market tends to anticipate, to discount earnings growth well in advance of it happening," Hayes said. "So by the time you get the peak earnings growth, the market tends to have discounted it." This anticipatory characteristic of the market means that stocks turn in their best performances when earnings are disappointing. Only in hindsight does it become clear that stock prices had moved higher because investors had perceived that earnings were bottoming out and about to turn up. Not that earnings growth is bad for stocks, of course. It's simply that big jumps in profits cannot be expected to support stock prices that have already been levitating for quite some time. "What really drives stocks is what people are expecting," Hayes said. "If expectations are really high, you're setting yourself up for disappointment." And what does that mean for stocks? In the current market, where many of the biggest and most popular stocks are still priced for perfection, it just may be that perfection is not enough. " from Applying a Discount to Good Earnings News By GRETCHEN MORGENSON