The Mainstream Says The Worst Is Behind Us: Are They Right? | Elliott Wave International

The Mainstream Says The Worst Is Behind Us: Are They Right?

By Nico Isaac Tue, 15 Jun 2010 09:15:00 ET	Email | Print | RSS | My Updates	Bookmark and share It!

We've got a suggestion for David Letterman's next "Top's" list: The top THREE reasons the mainstream financial pundits say stocks (and the economy at large) are finally out of the woods:

• Reason Number Three: There are too many naysayers out there.

Case in point: A June 10 BusinessWeek cover featured a giant grizzly bear costume hanging fang-first from a wall hook with the caption, "Time to Slip into Something Less Comfortable?" Yet another popular news source recently announced "Stock Market Bears Are Back" and said the "increasing pessimism is a positive contrarian indicator for long-term investors." (MarketWatch).

There's just one problem with this, which is -- as of May 27, "According to the Investors Intelligence survey of investment advisors, the percentage of bulls is still ten percentage points higher than the percentage of bears, despite [the April-May] 1480-point Dow decline. Sentiment is still a long way from the inconsolable pessimism..." -- points out the June issue of EWI's Elliott Wave Financial Forecast (online now.)

• Reason Number Two: The sell off in stocks is a promising sign.

"Corrections are routine and even healthy events. The sell off may be creating favorable points of entry for investors." (May 27, 2010 BusinessWeek)

Ah yes, the ole "dip-buying" mantra of all great manias. The idea comes around like clockwork after a soaring stock market suffers its first few freefalls and recommits fully to the downside. See this doozy from July 2007, as stocks were starting their biggest collapse in decades: "The biggest losses in equity and credit markets are making US stock bulls more bullish." (Bloomberg)

• And now, the number one reason why stocks are set to soar: Earnings are off the charts.

"Stocks enjoy longest winning streak since October on economic optimism. Analysts have raised their average 2010 earnings growth forecasts for the S&P 500." (June 14, 2010 Bloomberg BusinessWeek)

This belief of earnings driving the stock market is the backbone of mainstream economic thought. Yet in the December 2009 Elliott Wave Financial Forecast, EWI's analysts exposed a fatal flaw in this notion: strong earnings often coincide with market peaks, and weak numbers with lasting bottoms!

To illustrate this fact, the December 2009 Financial Forecast presented the following close-up of the S&P 500 versus Quarterly Earnings from 1999-2009.

Shortly after the release of this publication, EWI president Robert Prechter addressed the great "Earnings" myth in the still-talked-about February 2010 Elliott Wave Theorist. There, Bob identified a "history-making departure" from the expected relationship between earnings and stocks: the 1973-4 bear market. Here are the pointed details:

"Earnings per share for S&P 500 companies surged for six quarters in a row, during which time the S&P suffered its largest collapse for the entire period from 1938 to 2007, a 70-year span. Moreover, the S&P bottomed in early October 1974, and earnings-per-share then turned down for 12 straight months."

Don't wait another minute. Get objective insight into the near-, and long-term trends underway in the world's leading markets today: a risk-free Financial Forecast Service subscription is just a click away.

Tags: S&P 500, earnings, bob prechter, Dow, bears, bulls