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Rare Signal Passes 'Vicious Dog' Significance Test and Screams 'Sell'

Rare Signal Passes 'Vicious Dog' Significance Test and Screams 'Sell'
(AP)

By    |   Tuesday, 17 November 2015 08:02 AM

Earnings drive prices in the long run which make a long-term decline in earnings the perfect storm for the stock market.

Forecasts published by Standard & Poor’s analysts now call for earnings in 2015 to be lower than they were two years ago in 2013. This will be the fourth time since 1988 when earnings came in lower than they were two years ago.

The other three occasions — 1991, 2000 and 2008 — were associated with bear markets and recessions.

This signal, a decline in earnings compared to two years ago, is significant because it is rare.

But it is also impossible to test for statistical significance because it is so rare. That means it will be ignored by many analysts.

At least one analyst, futures trader Larry Williams, has developed an alternative test for significance.

He asks: “What you would do if you stepped outside, turned right to walk down the block and half a block away were attacked by a vicious dog three days in a row?”

Personally, I would avoid the danger on the fourth day even though I couldn’t prove the viscous dog attacks were statistically significant.

While three signals for declining earnings aren’t statistically valid, this does pass the "vicious dog" test. Investors should consider whether or not they’re willing to face a possible mauling before adding new money to their investments.

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MichaelCarr
Investors should consider whether or not they’re willing to face a possible mauling before adding new money to their investments.
stocks, invest, vicious Dog, sell
226
2015-02-17
Tuesday, 17 November 2015 08:02 AM
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