Warning of Better Times Ahead for Shares
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As if you really needed more evidence of the perversity of the stock market, analysts at ISI Group in New York have determined that the greater the number of negative preannouncements in the month before the end of a quarter, the better stocks tend to do at the start of the next quarter.
This insight has become especially relevant as the announcements of unexpected earnings shortfalls have been falling like a hard rain on Wall Street in the past two weeks. It's one thing when earnings-challenged basket cases such as telecom chipmaker Broadcom (BRCM) admit they've blown it again. But it's quite another when American icons such as Coca-Cola (KO) and Colgate-Palmolive (CL) come clean with shocking disappointments.Intuitively, you would guess that a high rate of negative preannouncements would lead to declines in share values over the following month. And you would think that a low rate of negative preannouncements would tend to lead to stronger share values in the subsequent month. But you would be wrong on both counts, according to ISI's eye-opening analysis. Earnings estimate data in June this year, according to the report, showed that the negative-to-positive preannouncement ratio for stocks in the S&P 500 was less than 1.0. That shouldn't have been considered good news. Instead, says ISI, it was a sign that most positive earnings scenarios for the quarter had been priced into equities -- and that a lousy July was around the corner. And that is what happened, as the S&P 500 sank a whopping 3.4% in the month. Conversely, then, it may be great news that preannouncements have been so wildly awful this month. According to First Call, the negative/positive preannouncement ratio for the S&P 500 in September so far is 1.9. Analysts' earnings expectations for the coming quarter have thus become gloomy. Indeed, they're the most dreary since the third quarter of 2003. The ratio for tech stocks in the S&P 500 is a touch higher than for the broad market, at 2.0. So the upshot is that while September may be rough from the standpoint of news, the negativity may be setting the table for improved market performance in October. Here's a brief glance back at the recent historical record to show how this has played out before:
|S&P 500 Stocks With Negative Analyst Growth Expectations|
|Company Name||Symbol||Next Yr % Est. Growth||Current Qtr. % Est. Growth||StockScouter Rating||Last Price|
|Lehman Brothers Holdings||LEH||-3.6||-14.6||9||$76.02|
|Source: MSN Money|
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