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Monday, August 6, 2012

Earnings Revisions Leading Indicator (ERLI)

Earnings and people's opinions of future earnings is the primary driver of stock prices.  Goldman Sachs puts out what they call the Earnings Revisions Leading Indicator (ERLI) .  Similar to the ISM data is that 50 marks the line between contraction and expansion.  Check out these charts.

Source: Goldman Sachs

There was clear penetration of the 3 month MA of the ERLI below the 50 line in 2002 and SPX had a big crash.  The cross back above 50 in 2003 was accompanied by a major rally and new bull market. During the 2003-2007 bull market, we can see the 3 MMA only briefly penetrated the 50 level twice. Notice the SPX monthly chart saw minor pullbacks during those same time periods.  The 3 MMA crashed in 2008 along with the market.  The big turn up in the ERLI in 2009 was met with a big rally in SPX.  Notice the penetrations of the 50 level in 2010 and 2011 corresponding with 15-20% pullbacks in SPX.  Unlike the 2003-2007 time period, these were significant penetrations.  We currently have the biggest penetration of the 50 level since 2008.  Maybe this is just coincidence or maybe it will be different this time.  But what if it isn't?


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.