Earnings season is almost behind us but it’s interesting to note that almost 80% of the quarterly releases met or exceeded consensus estimates for the S&P 500. That’s the good news!

The bad news is that earnings estimates are coming down. In fact, current quarter earnings estimates are being revised down with reckless abandon.

For the week, there were only 162 upward revisions compared with 236 downward revisions. Only 85 remained unchanged.

What’s more is the magnitude of the revisions. According to Bloomberg research, earning estimates are down 5% from their peak, something that has only occurred six times since 1991… and three of those coincided with recessions in 1991, 2001, and 2008.

Analysts move in herds and are slow to adjust their estimates too far in one direction or the other. So all of this revision is a warning sign for me.

Besides, the market sentiment is too bullish for my liking.

Sentiment Trader tracks the market opinions of “smart money” and “dumb money.” The smart money represents investors who are often adept at navigating the markets profitably while the dumb money is pretty good at handing their money over to the markets in the form of losses. As you can imagine, the smart money and dumb money often disagree.

But currently that’s not the case. Both groups are wildly bullish on the market. In fact, they’re so optimistic that the combined bullishness has been exceeded only once before, in 2004.

A quick pullback in the markets then pulled the sentiment way down before the market trend resumed its upward march to the pre-crash highs in 2008.

That’s another warning sign for me. Both sides don’t agree often. In fact, the combined sentiment has only been this bullish 10 times in the last 15 years. And right now, nearly everyone is leaning on the same side of the boat. When they all try to run to the other side at the same time (sell stocks), the boat is likely to capsize.

Get your life jacket ready. You’re going to need it.

John Signature


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John Del Vecchio
In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.