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Far From Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement by Richard Lehman

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Chapter 4. Random and Efficient Markets

It is unlikely that the random walk hypothesis provides an exact description of the behavior of stock market prices.[12]

Eugene Fama

With its roots strongly wrapped around current values of future earnings streams, fundamental analysis performs reasonably well during periods of steady growth and commensurately rising earnings. But at times when earnings are erratic, declining, or affected by significant one-time write-offs, the fundamental method becomes seriously challenged, and the variance between analyst estimates and actual earnings can sometimes render fundamental analysis almost totally unusable. Well into the fall of 2008, and amid the most severe drubbing of stocks in several decades, analysts let their forward-looking earnings estimates get so far behind reality that it was almost laughable. ABarron's reporter wrote, "Talk about out of touch: Analysts currently estimate that earnings for the companies in the [Standard & Poor's (S&P) 500 Index] will rise 29 percent in the fourth quarter, and keep climbing, by 15 percent in 2009, to a record $91.41 a share, according to Thomson Reuters. That seems wholly unrealistic, given the recent jump in unemployment, the credit crisis and last week's news that the economy contracted at a 0.3 percent annual pace in the third quarter."[13]The reporter polled a handful of prominent market strategists whose consensus was that earnings for the S&P stocks in 2009 were more likely to come in at around ...

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