EPS Estimates

Public companies on the US Stock Exchanges are required to report to the Exchange the following:

Many Analysts and Market researchers monitor company Earnings Estimates. There is an industry devoted to watching any company news that may affect Earnings. Earnings Estimates are scrutinised.

In particular, analysts compare companies' Earnings Estimates with the Actual Earnings once a Quarter is completed.

While some variation occurs, the monitoring of companies by analysts has created an environment of accountability. Some companies' Estimates are slightly high while others slightly low. Estimates overall only vary for the next Quarter from initial Estimates to Actual by a small %. In general, companies tend to slightly underestimate future Earnings.

EPS Estimates are forecasts into the future and are not based on any technical analysis indicator or other "lagging" calculation.

With a small variation of a small %, EPS Estimates provide the best indicator for predicting future S&P500 price trends.

Interpreting EPS Estimates is not as simple as just looking at whether the company is making a profit or not. Interpreting EPS Estimates is a complex issue.

If a company releases an EPS Estimate that is perhaps 0.25% less than the previous Quarter, how will traders react? What about if the EPS Estimate rises by 5% or falls by 5%?

Interpreting EPS data is complex. Some of the inherent complexities include:

• 1

  EPS Estimates are Quarterly. How to apply them to a shorter time frame such as the next month.

• 2

  EPS Estimates are often updated and revised. Usually several updates are released every week from a small number of the 500 S&P500 companies.

• 3

  How accurate and reliable are the EPS Estimates.

• 4

  How will traders react to the different types of EPS Estimates.

At what level of EPS change from one Quarter to the next is there likely to be a SPY fall? These are the questions every trader and Fund Manager must answer:

• At what level of EPS change from one Quarter to the next is there likely to be a SPY fall?

• Is just a simple negative EPS indicative?

• Maybe it needs a drop of more than a certain %?

• Maybe a series of negative EPS Estimates?

• If an EPS drop of perhaps -5% is estimated for the next Quarter (3 months ahead), at what date should a trader take action? Maybe now, or 1 month prior, or wait until the start of the Quarter that has the adverse EPS?

• If an EPS is estimated to rise perhaps +1.5%, what does that mean for the SPY if the following Quarter is perhaps +0.10% or even -0.10% change?

• If a big EPS fall of perhaps -10% is estimated for the coming Quarter and then the SPY crashes during that Quarter, when will a rebound occur? Will it be the first Quarter with positive EPS, or only when EPS rises by +5%, or only when two Quarters in a row rise, or only when all EPS falls have been recovered?

• EPS Estimates data is compiled and analysed weekly as released by the S&P500 companies.

• Firstly, we calculate the Quarterly change in EPS as a %. We then compare to the SPY (as a good proxy for the S&P500 index).

Next we adjust the Quarterly data into Monthly data using our proprietary weighting.

We look at one Month at a time going forward and consider:

Assign a Risk Rating based on the assessed risk of an S&P500 fall using 8 risk assessment criteria: