Kudos to CNBC for their guest selection this morn:

My colleague Tony Dwyer was on, discussing his expectations for 12% or so growth. Tony notes that this makes him an outlier — one of the more bullish strategists on Wall Street, which is somewhat ironic. He and I have discussed the 2nd derivative of earnings — the change in year over year SPX earnings growth % — which he disses, but TD otherwise did a fine job.

Later in the show, Mark Hulbert came on, to discuss (by coincidence or clever counter-programming?)  year over year SPX earnings growth %.

Note that we have covered this fairly extensively, most recently here (How to Use Earnings as a Buy Signal) and here (Earnings and Subsequent Market Gains).

I agree with the thesis, which was put forth by MIT and Rochester profs, validated by Ned Davis Research, and reported by Hulbert — but not neccessarily the reasoning.

Why? The academics look to weak earnings as an eventual spur to interest rate cuts; I prefer to think in terms of sentiment

"The key to this lies with psychology: Perception versus reality. When year-over-year earnings % improves from awful to merely bad, the headlines [will still be] extremely negative. But this is the earliest part of any recovery, and no one — at least, almost no one — [will have yet] recognized the changing character of the economic cycle. Hence, even though the mood is palpably morose, that’s when you gotta buy ‘em: Not only when everyone hates ‘em, but when we see quantititative proof of the cycle turning."

I still think that’s the right explanation; But if you go back and test the quant data (as NDR did), the reason doesn’t really matter. Consider interest rate cuts as a reflection of a very specific sentiment — the Fed’s worries — which may be the ultimate sentiment indicator in the market.

Category: Markets, Media

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2 Responses to “Mark Hulbert on CNBC”

  1. bjr@yahoo.com says:

    Please correct me if I’m wrong, but isn’t the rate of change of acceleration the third derivative? Here’s what I found.

    It is well known that the first derivative of position (symbol x) with respect to time is velocity (symbol v) and the second is acceleration (symbol a). It is a little less well known that the third derivative, i.e. the rate of change of acceleration, is technically known as jerk (symbol j).

  2. In Physics, or Finance? I’m not sure which is most applicable to the formula, but you may be right in Physics.

    In finance, there is the change in earnings, and then the % change on a Y-Y basis . . . that looks like a 2nd derivative to me . . .