Bespoke Investment Group believes that the U.S. stock market is ready to roar despite a disappointing start to the year.
Bespoke’s first piece of evidence is the “beat rate” of NYSE-listed companies that are surpassing the revenues expected by analysts. This rate is 72% this quarter, the highest level seen since the fourth quarter of 2004.
Bespoke’s second piece of evidence is its upside volume indicator, which takes the 10-day volume in NYSE-listed stocks trading higher and divides this number by the total volume of trades. “Compared to the average reading of this indicator since 2002, the current level is two standard deviations below normal,” according to Bespoke. This, in theory, indicates that the market is extremely oversold and ready to rebound.
It will be interesting to see if Bespoke’s logic is correct. At the very least, it is nice to see a firm going beyond the usual practice of calculating the beat rate based on forecast earnings. This can produce deceptive results since earnings are volatile and can be manipulated in various ways. A beat rate calculated on the basis of forecast revenue is a far more reliable indicator of whether companies are actually growing faster than expected.
Freelance business journalist Ian McGugan blogs for the Financial Post.