Stock Take

Future earnings: The US third-quarter earnings season is over. The earnings "beat rate" – 62 per cent – is one of the lowest quarterly readings since the bull market began in March 2009.

Nevertheless, it is in line with historical norms and is slightly higher than the last two quarterly readings. Given the endless economic agonising, earnings have been solid.

However, earnings guidance has been poor. Almost 9 per cent of companies lowered guidance, with only 6.8 per cent raising it.

It is the first time since the bull market began that more stocks lowered guidance than raised it, Bespoke Investment Group notes.

Market strategist Ed Yardeni says analysts are also lowering earnings expectations, with the percentage of downward revisions at its highest since May 2009.

Corporate earnings have surged for almost three years, but the deteriorating economic outlook appears likely to hit profits sooner rather than later.

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Market swoon:Bulls must be disappointed with the recent market swoon. October's advance ended at the SP 500's 200-day moving average. The bears managed to protect that much-watched level, whereas recent falls have seen the index slice through its 100- and 50-day moving averages. The SP broke out of a two-month sideways trading range last month, but has slipped back into that range.

The technical situation is still in the balance, however. Markets have retraced half of their October gains, a percentage pullback area that is often used by bulls seeking to add to positions.

Secondly, 40 per cent of stocks are trading above their 50-day averages. More severe declines result in that figure falling to about 20 per cent or sometimes even single digits. In other words, market breadth suggests this is a pullback from overbought levels, not a sell-off – for now at least.

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Cutting hedges:With most international stock markets having gone nowhere over the past decade, investors could be forgiven for opting for hedge funds to secure market-beating returns.

Morgan Stanley this week noted that hedge-fund performance has been no better in recent times, however. While they outperformed during and after the dotcom bubble, correlation between hedge-fund returns and SP 500 returns has risen sharply in recent years. Index funds have actually outperformed hedge funds over the past five years.

So stick with index funds, but don’t assume the recent market drought – US stocks are at almost identical levels to where they ended the last century, and European markets are substantially lower – is unprecedented.

Eddy Elfenbein of the Crossing Wall Street blog notes that the Dow Jones closed at 96.05 on December 12th, 1905. It closed at the same level on April 17th, 1942 – a famine exceeding 36 years.