The True Driver of Supply/Demand

Discussion in 'Trading' started by RangeTrader, Aug 7, 2012.

What do you think of the theory below?

  1. Love it, Totally Accurate

    1 vote(s)
    50.0%
  2. Hate it, I Am Stuck Short

    0 vote(s)
    0.0%
  3. Wha?

    1 vote(s)
    50.0%
  1. This is very interesting... The market has the strongest steadiest gains when growth is slow or negative.

    "When quarterly earnings growth was less than 5% and not worse than minus 20%, the S&P 500 index (SPX) grew at an annualized average of 12.4%.

    This compares to an average annualized return of just 2.4% whenever earnings growth was above 20% and 6.4% when that growth rate was between 5% and 20%."


    Here is my theory about this...

    Ok, lets say that the stock market is a Casino game... Which it is pretty much. What drives supply/demand for gambling?

    When people are under pressure or not making as much as they would like they take risks and gamble. Many people dived into the 2009 rally all in with full margin gambling that they would get their "Obama Money." When the economy is so good earnings are going through the roof everyone is making so much money in business there is no demand for stocks and nobody pays them any attention.

    So the bottom line is... In a negative economic environment where there isn't enough deflation to reduce the amount of money within the system... Demand increases for stocks as people go toward gambling when the economy is slow. "Can't make any damn money contracting... Ill go gamble and buy me some damn stocks!!!"

    Funny theory, but what do you guys think?


    Full Article:
    "Good news: Earnings growth is slowing

    Commentary: A contrarian — and surprising — take on earnings

    By Mark Hulbert , MarketWatch

    Last Update: 12:01 AM ET Aug 7, 2012

    CHAPEL HILL, N.C. (MarketWatch) — Worried that lower earnings growth will lead to a bear market?

    You’re not alone. Almost everyone else is concerned too.

    But, by following the herd, you run the distinct possibility of becoming too worried: The stock market historically has performed better when earnings growth is slower than when it is faster.

    That at least is the conclusion reached by a study conducted by Ned Davis Research, the quantitative research firm. After analyzing year-over-year earnings growth back to 1927, the firm found that the stock market tends to underperform whenever earnings growth is particularly strong.

    The reason for this counterintuitive finding, according to Ed Clissold and Dan Sanborn, U.S. market strategists for Ned Davis Research and co-authors of the study: The market senses that high earnings growth is unsustainable, and is therefore discounting an imminent “slower earnings-growth environment.”

    Take a look at the accompanying chart. The Ned Davis analysts found that the stock market historically has performed the best during periods in which year-over-year changes in quarterly earnings were either flat or falling modestly: When quarterly earnings growth was less than 5% and not worse than minus 20%, the S&P 500 index (SPX) grew at an annualized average of 12.4%.

    This compares to an average annualized return of just 2.4% whenever earnings growth was above 20% and 6.4% when that growth rate was between 5% and 20%.

    What does this all mean for the current market?

    Earnings per share for the S&P 500 for the quarter we’re in right now are estimated by Standard & Poor’s to be $25.18 on an “operating earnings” basis, and $24.18 on an “as-reported” basis. That’s 0.4% lower and 6.8% higher, respectively, than the comparable totals for the year-ago quarter.

    As Clissold and Sanborn put it, these “consensus estimates call for earnings growth to oscillate between the two middle — and most bullish — zones” of the accompanying chart.

    Another, perhaps equally counterintuitive implication of the Ned Davis study: If indeed earnings growth slows as expected, growth stocks are likely to outperform value stocks. I found this surprising, since value stocks are less overvalued than growth stocks.

    But Clissold and Sanborn explain: “In a slow-growth environment, a premium is placed on companies that continue to deliver top-line and bottom-line growth. Almost by definition, those are growth stocks.”

    The bottom line? Once again, it pays to at least consider a contrarian perspective. Without it, you’d risk becoming far more gloomy and pessimistic than the historical data actually suggest is justified. "
     
  2. From the data I have created a plot which shows the curve of earnings growth vs stock performance year over year. (Hand Drawn) The green arrow points to the sweet spot... Where stock performance is the best!!!

    Not perfectly accurate... A quant isn't going to give you their exact mathematical curve they developed... But you can deduce what it is from what they said approximately. Notice the shape of the curve. Quiz: Remember what this type of curve is called? :D From these few data points they gave away you can likely generate the exact precise curve. If anyone feels like doing the work go ahead...

    I solved some of the data points approximately from their numbers, but because of the curve type these numbers actually need to be offset slightly and that has to be calculated out. I simplified and just solved based upon the middle of the range being the number....

    Earnings Growth - Stock Growth
    -20% = 0%
    -7.5% = 12.4%
    12.5% = 6.4%
    20% = 2.4%

    You know, some of this quantitative analysis stuff is actually quite interesting... I might look deeper into it if I'm ever interested in fundamentals.

    This actually might have more to do with past economic cycles topping out with extremely high sentiment and earnings growth.

    [​IMG]
     
  3. "When quarterly earnings growth was less than 5% and not worse than minus 20%, the S&P 500 index (SPX) grew at an annualized average of 12.4%.

    This compares to an average annualized return of just 2.4% whenever earnings growth was above 20% and 6.4% when that growth rate was between 5% and 20%."


    Total change of S&P 500 was net +27% in all 13 years, about 2% per year.

    Change>S&P500>Year
    Start>1068>1998
    20% >1227> 1999
    -11%>1469> 2000
    -12%>1312> 2001
    -25%>1160> 2002
    26%>874> 2003
    10%>1097> 2004
    3%> 1210> 2005
    14%>1246> 2006
    4%> 1415> 2007
    -41%>1475> 2008
    29%>871> 2009
    12%>1125> 2010
    1%> 1258> 2011
    End>1275> 2012
     
  4. I don't think modeling off of old data is going to be too applicable in the next few years.

    If you look at trimtabs and all of the current quant research most all market correlation in recent years is with ben bernanke, merkel, the ecb, and the central banks.

    They are the primary drivers behind market sentiment until this crisis blows over.