Profits & Earnings Suggest The Bear Market Isn’t Over.
Is the bear market over yet?
This is the question that everyone wants to know. Why? So they can “buy the bottom.”
For that reason alone, I would suggest the current “bear market” is not over yet. Historically speaking, at the bottom of bear market cycles, as we saw in 1932, 1974, 2002, and 2008, there are few individuals willing to put capital at risk.
Given the large number of people on social media clamoring to jump back in the market given the rally this past Friday, it suggests that “optimism,” and “recency bias,” are still far too prevalent in the market.
ShareIs the bear market over yet? This is the question that everyone wants to know. Why? So they can “buy the bottom.”For that reason alone, I would suggest the current “bear market” is not over yet. Historically speaking, at the bottom of bear market cycles, as we saw in 1932, 1974, 2002, and 2008, there are few individuals willing to put capital at risk.Given the large number of people on social media clamoring to jump back in the market given the rally this past Friday, it suggests that “optimism,” and “recency bias,” are still far too prevalent in the market.As noted in this past weekend’s newsletter, Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow. “Rule #8 states:Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend.”Bear markets often START with a sharp and swift decline.After this decline, there is an oversold bounce that retraces a portion of that decline.The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.While the correction has been sharp in recent weeks, it hasn’t inflicted enough “emotional pain” to deter individuals from jumping back in. As I stated: “That selloff sets up a ‘reflexive bounce.’ For many individuals, they will ‘feel like’ they are ‘safe.’ This is how ‘bear market rallies’ lure investors back just before they are mauled again in ‘Phase 3.’”Just like in 2000, and 2008, the media/Wall Street will be telling you to just “hold on.” Unfortunately, by the time “Phase 3” was finished, there was no one wanting to “buy” anything.That’s how you know a “bear market” is over.Price To Profits & Earnings From an investment view, I prefer more data-driven analysis to determine if the current bear market is over.In a previous post, I discussed the deviation of the stock market from corporate profitability. To wit: “If the economy is slowing down, revenue and corporate profit growth will decline also. However, it is this point which the ‘bulls’ should be paying attention to. Many are dismissing currently high valuations under the guise of ‘low interest rates,’ however, the one thing you should not dismiss, and cannot make an excuse for, is the massive deviation between the market and corporate profits after tax. The only other time in history the difference was this great was in 1999.”It isn’t just the deviation of asset prices from corporate profitability which is skewed, but also reported earnings per share.As I have discussed previously, the operating and reported earnings per share are heavily manipulated by accounting gimmicks, share buybacks, and cost suppression. To wit: “It should come as no surprise that companies manipulate bottom-line earnings to win the quarterly ‘beat the estimate’ game. By utilizing ‘cookie-jar’ reserves, heavy use of accruals, and other accounting instruments they can mold earnings to expectations.‘The tricks are well-known: A difficult quarter can be made easier by releasing reserves set aside for a rainy day or recognizing revenues before sales are made, while a good quarter is often the time to hide a big ‘restructuring charge’ that would otherwise stand out like a sore thumb.What is more surprising though is CFOs’ belief that these practices leave a significant mark on companies’ reported profits and losses. When asked about the magnitude of the earnings misrepresentation, the study’s respondents said it was around 10% of earnings per share.’“
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