Market Gets Ahead of Profits

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Stock market bull is feeding on corporate profits – Economy Watch on NBCNews.com.

The purpose of this article is to attract readers who have invested in the market and need reassurance to continue maintaining their money there.  The writer is nice enough to show them why he believes the market will keep rising, and who knows, maybe his prediction will prove correct.

However, the title of the article, which also serves as its central theme, is misleading.  For a time, the market was reacting to improving profits, but those seem set to level off.  Profits cannot rise forever, and trouble in Europe, Japan and even China are limiting profit increases in the American multinationals that comprise the bulk of the S&P 500.

For illustrative purposes, I have erased the forecasted profit line in this chart from the CNBC article shown above.  Now, it becomes easier to see that stock prices have grown at a faster rate than profits for the last year or so.  Whenever this happens a correction soon follows.  Note the red ellipses:

SP Price vs Profits

Also, be aware that whenever the rise becomes too steep, a fall is in order.  The speed of the market ascent has not been matched since 1999.

Of course, as long as the Fed’s magic money machine remains on, the market will keep rising, profits be damned.  Just remember that Bernanke giveth, and Bernanke taketh away.

AHEAD OF THE TAPE: Investors Ignore Negativity at Their Peril – WSJ.com.

This WSJ article reveals that 86 S&P 500 companies have issued earnings guidance with a ratio of 3.58 negative to positive updates.  This is the highest that the negative to positive ratio has been since the series began in 2006.

In the 3rd quarter of 2007, the number peaked at 2.38 presaging the 2008-9 bear market.

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