None of my indicators have been more prescient than my expectation ratio. It kept me out of the entire 2008 decline and gave me confidence in February and March that the market psychology had gotten far too negative (For new readers please see here for more info on the ER).
As regular readers know, it is an intuitive forward looking indicator. Currently, the ratio still sits in firmly positive territory, but has experienced a recent bout of weakness as analysts boost their expectations and companies temper expectations. All in all, the ER is forecasting another positive earnings season where the majority of companies beat and raise guidance, however, as expectations jump it’s like that the days of 10% rallies during earnings season are behind us. Expectations are now coming much more in-line with actual earnings and that means the stock market is likely to temper its meteoric rise.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.