What Do The Current Earnings Reports Tell Us About The Stock Market?

By: Avi_Gilburt

I am going to let you in on one of my pet peeves this week: I abhor intellectual dishonesty in analysis. And, earnings season always brings to light some wonderful examples.

I was recently told quite confidently by another contributor that the direction of a stock is based upon its earnings. I know this is a common view within the market, but it is far from the truth.

While everyone thinks the market makes sense when a stock price rises on a good earnings report or drops on a bad earnings report, let’s try to understand what happens when a stock declines on good news. So, when blow-out earnings about a company are announced, yet the stock immediately begins to decline, the common theme we hear from the talking heads is that the earnings news was already “priced in” to the stock price. Right?

This is exactly what occurred to Netflix (NASDAQ:NFLX) this past week, as they reported blow-out earnings, yet the stock was down over 1% the next day.

But, what do the talking heads parrot in unison? “The information was already priced in.” And, yes, each and every person listening to or reading these talking heads simply nod in sheepish acceptance. Have any of you actually considered what this really means?

If you believe that blow-out earnings were already priced in when a stock declines after those earnings are announced, then you must believe that the market is omniscient. It must mean that the market knew what the earnings would be before they were announced and pushed the stock price up with the expectation of blow-out earnings. By the way, I thought they called this “insider trading” – but that is a whole other matter.

So, the logical question then is why were the analysts so surprised by such a blow-out earnings if it was “priced in” and already expected by the market? Do the analysts not understand the market?

Are you seeing the circular reasoning this “priced in” perspective is based upon?

Well, I don’t know about you, but I think the “priced-in” premise is based upon horse manure. I do not believe investors are omniscient. The “priced-in” premise is another way for the analysts to say we have no clue why the stock declined on good earnings news. Otherwise, if investors really knew the information beforehand in order to push the stock price up in anticipation of these earnings, then we would not have a prohibition against insider trading.

But, if you want to hear the truth about earnings, simply ask the insiders of a company. This comment mirrors many similar comments I hear from CEOs and CFOs of large corporations that are clients of mine:

“Having worked for many listed companies and regarded as an insider with access to company confidential information, I have sometimes struggled to understand the correlation between business results and the share price.”

For those that are still unconvinced, consider why earnings lag the stock price both at the top and the bottom of markets. I outline the reasons why in this article, so please take the time to read it if you are as of yet unconvinced, and want to have a better understanding.

How To Analyze Market Sentiment Along With Market Fundamentals

While we are at it, consider that this “priced in” poppycock narrative is really no different than the fallacious Fed narrative that is also promoted by these same talking heads.

If the market would drop after a good economic report, the talking heads would claim that investors viewed this as a reason for the Fed to not be as accommodative, and that is the reason the market dropped. Yet, if the market rallied after a bad report, the talking heads would claim that investors view this as a reason for the Fed to be more accommodative towards the market and that is the reason the market rallied.

At the end of the day, all of these narratives are akin to us seeing a large pile of elephant dung before us, someone on TV authoritatively claiming that it really is a pile of gold, and all of you nodding in sheepish acceptance. Lesson for today: do not be sheep. Learn to think on your own, and test everything you read or hear through the prism of logical truth.

As far as the market is concerned, the bulls certainly did a good job in taking us to a new market high. Moreover, I do not think it is a secret that I expect the next bull market rally to take us to at least the 4900SPX region into 2022. But, I always want to see a strong initial setup for that rally. For now, I still do not have a 5-wave rally structure off the recent low to set up the next rally to 4900SPX. Yes, that applies even though we have struck a new all-time high. As I outlined before, I expected a new all-time high and then a larger retracement before we begin the rally to 4900+.

I know some of you are now thinking “what do we need more to see other than the market hitting a higher high?” Well, to be honest, it is entirely possible for a corrective rally to hit a new all-time high, and still provide us with a very strong decline to a lower low thereafter. And, I will point to February 2020 as the perfect and most recent example. Believe it or not, that high was the top of a corrective wave that made a higher high, and then provided us with the March 2020 decline to complete a larger degree correction. So, while many believed that the March 2020 meltdown was only the start of a larger degree bear market at the time, if you read my analysis, you would know I was confidently looking at it as the culmination of a larger degree market correction. That was why I was confidently looking to 4000+ off those lows, while most others were looking for the next shoe to drop.

Therefore, I will reiterate that this rally to a new all-time high can also be a corrective rally. What I need to see is a corrective pullback from this all-time high, followed by one more higher high to complete 5-waves off the 4270 region low. Thereafter, we will see another larger corrective retrace back towards the 4400-4500SPX region (the next buying opportunity after a 5-wave rally has been completed), and only then will the market likely be primed to begin the rally to 4900+.

And, until such time as we complete that 5-wave structure, there still remains potential to revisit the 4270SPX region one more time before we begin the next rally to 4900+ into next year. The nature of the next pullback will provide us with the evidence we need to distinguish between these two near-term potentials. Furthermore, I am now assuming that by the Thanksgiving holiday the market will have likely provided us with a strong pattern that will provide us with a high probability and trackable structure pointing us to 4900+ into the first quarter of 2022. So, I am going to be maintaining just a bit more patience before I determine where my next buying point will be before the rally to 4900+ begins in earnest.

I know that many are still quite skeptical of our ability to accurately track markets using Fibonacci mathematics, as this person recently noted:

“I'm still skeptical about fibonacci pinball, elliott waves and so forth, but it's an empirical fact that this man is able to call market tops and bottoms with surprising consistency.”

You see, our methodology simply ranks probabilistic market movements based upon the structure of the market price action, which we calculate based upon Fibonacci mathematics. But, even more importantly than providing us high probability turning points in the market, our analysis methodology tells us quite early on when our initial assessment is wrong. But here is the most important part of the analysis: We also provide you with an alternative perspective at the same time we provide you with our primary expectation, and let you know when to adopt that alternative perspective before it happens.

As I have said many times before, this is no different than if an army general were to draw up his primary battle plans, and, at the same time, also draws up a contingency plan in the event that his initial battle plans do not work in his favor. It is simply the manner in which the general prepares for battle. We prepare for market battle in the same manner.

So, while I will never be able to tell you with certainty how the market will move in the coming weeks, months, and years, I present you with enough information to know where my primary perspective is wrong so that you can adjust in order to take account for the alternative situation. And, until such time that the market proves our primary perspective is wrong, we will continue to follow our primary perspective, which at this time is pointing us to much higher levels in the coming years.

By now, I hope you recognize the difference in our analysis approach, other than the accuracy thereof. We strive to view the market, and utilize our mathematically based methodology, in the most objective fashion as possible, no matter how crazy it may sound. Moreover, it provides us with objective levels for targets and invalidation. So, when we are wrong in the minority of circumstances, we are able to adjust our course rather quickly, rather than fighting the market like many others you may read have been doing during this entire rally off the March 2020 lows.

So, while I hope I am helping many of you in maintaining an objective perspective within this non-linear environment we call the stock market, I want to wish you all well in your future trading and investment endeavors. As of now, I maintain my long-held expectation to see the market in the 6000SPX region in the coming years, of course, unless the market tells us otherwise. But, please approach the market with the respect that a bull market deserves, as surprises usually come to the upside, and we likely have much higher to go before this bull market ends.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.

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