The definition of groupthink is, "a psychological phenomenon
that occurs within a group of people in which the desire for
conformity in the group results in an incorrect decision-making
outcome. Members try to minimize conflict and reach a
consensus decision usually without evaluation of alternative
There may not be a better example of this than Wall Street's
Wall Street's Modus Operandi
Many Wall Street "professionals" have S&P 500 price
targets going up, up, and away. Price targets continue to be raised
as the markets rise and strategists chase price. If you look
at Wall Street analysts' price targets history, rarely, if ever do
they assume the markets will decline, even though we all know that
the markets do indeed decline as well as rise.
Even in 2008 Wall Street kept earnings targets above the market
reality as the black line in the chart below shows. To hide
this fact and cover their tracks, they upped the amount of
projections they provided, coming out with new now lowered price
and earnings "forecasts" every two weeks in order to keep up with
the rapid market (NYSEARCA:VTI) declines.
A Dynamic Way for
Examining the VIX
The chart below from FactSet shows Goldman Sachs's (
) current S&P (SNP:^GSPC) price projections and their current
expectation of a $2100 2015 price target based on earnings growth
continuing, well, into perpetuity.
Conflicts of Interest
For thesestrategists it does not pay to go against the
grain. It is much easier to keep their job beingwrong when
everyone else is wrong, than it is to have an unbiased and
uniqueview of the markets.
This is thedefinition of groupthink as Wall Street rewards
For us atETFguide.com, we are allowed the luxury of providing
unbiased advice without conflictsof interest. This is why we
know thatearnings have already peaked out and won't hit their 2013
or 2014 estimates (justas they never hit their 2011 or 2012
targets) as outlined in my recent article,"
Ignore Earnings Estimates
". For one, history just does not support many examples of
earnings risingfor so long without at least a 20% pullback.
This howeveris only one of many reasons to not agree with Wall
Street's groupthink of everrising stock markets.
In the July issue of the ETF Profit Strategy
Newsletter I analyzed earnings growth going back to
the 1800sand found that Goldman's stance of ever increasing
earnings ispreposterous. Check out the followinggraph of
actual earnings growth over time.
If one thingis for sure, it is that earnings do not grow forever
into perpetuity. There is indeed a business cycle that
takesover as earnings instead are extremely cyclical.
Year overyear earnings have declined 37% of the time throughout
history and have fallenmore than 20%, 10% of the time.
Thisdirectly affected share prices as quarterly S&P prices
(NYSEARCA:SPY) havedeclined year over year a similar 37% of the
time and have been down more than20%, 7% of the year over quarters
throughout market history.
A normalearnings decline of 20% could easily pull the market
back to 1200.
Why else S&P 1200?
Over thehistory of the U.S. stock market, prices have gained
about 5%/year excludingdividends. Dividends have added
another3-5% on average resulting in the historical 8-10%
expectation of equity marketreturns.
The finalchart is one I created showing the long term
logarithmic trend of the Dow (NYSEARCA:DIA) overits 100 year
history. There is a clearlong-term projection.
It is obviousthere are better times to be long term buyers and
better times to be long termsellers.
When priceshave reached the upper end of the returns spectrum
(like in the 20s and 60sshown in red in the chart), long term
investors were better suited to takeprofits or move to safer assets
such as Treasuries (NYSEARCA:TLT), as theequity markets
(NYSEARCA:IWM) offered very low or even negative long
Similarlywhen prices have reached the lower end of the long term
average, such as in the30s, 40s, and 70s as shown in green in the
snapshot below, prices(NYSEARCA:VTI) offered great
opportunity. Generally, buying during these times awarded very
attractive long termreturns, well above the historical 5% average
(shown in blue).
The full chart and analysis is reserved for subscribers, but with
an S&P near 1700, prices (NYSEARCA:SDS) are now well beyond
their historical average range.
At ETFguide.com we prefer biases based upon
reality and to allow the data help us find our next
trading opportunities. This is why back in May we warned how
falling lumber prices would lead the homebuilder stocks
That has already started to play out as the homebuilders
(NYSEARCA:ITB) continue to lag the broader market and are now down
over 5% since then. They may even have a lot further to fall based
on a technical pattern I am following in our ETF Technical
Profit Strategy Newsletter
examines more reasons why S&P 1200 is an acceptable
downside target using our four pronged approach of fundamentals,
technicals, sentiment, and common sense. For a market that has
gotten well ahead of itself, 1200 is a logical first stop on the
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