Please see if you can guess when this quote was published:
If you guessed that this is today's quote -- after all, we are in the midst of another earning season -- good guess, but no. It was published on April 4, 2011.
Three weeks later the S&P topped and over the next 5 months, lost just shy of 20%.
We originally showed the quote above in our April 4, 2011, Short Term Update. Here's the rest of what the editor Steve Hochberg said in that issue:
One tell-tale sign that the stock market is in the very latter stages of its Primary-degree rally is the length to which some will go in order to rationalize ever higher share prices. The above story appeared on Bloomberg this morning; I've copied just the first two paragraphs, which are the most relevant.
To begin with, we are not surprised that earnings, a coincident-to-lagging indicator, are being used to forecast the stock market. EWI has on many occasions debunked the myth that earnings drive share prices, most recently in the December 2009 issue of The Elliott Wave Financial Forecast. But what is revealing, in our opinion, is the last sentence that we highlighted in yellow. Included with the story is this next chart to illustrate the "earnings gap" from Robert Shiller's data.
The article argues that rising earnings -- and projected earnings -- are bullish for stocks. Projected earnings are the single worst indicator to use in an attempt to forecast markets because analysts are outrageously bullish at tops and unduly pessimistic at bottoms, subject to the same herding impulses as all investors.
But more important, as the chart clearly shows (we added the two highlights and dates), Shiller's "earnings gap" recently exceeded the level that accompanied the 2000 stock market peak, after which the DJIA lost 38% of its value, and also exceeded the level that accompanied the 2007 peak, after which the DJIA lost 54% of its value. To construe this as somehow "telling investors that this is no time to sell stocks" appears to be an extreme in a rationalization as to why one should continue to keep their money at a high degree of risk.
In our view, this chart conveys the exact opposite message: Stocks are wildly and historically overvalued.
Dozens of companies will report their earnings over the next few days.
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