1991issue C091-3
Growth earnings and price-to-earnings as a market-regime overlay
Treat a rules-based earnings-growth basket as one geometric valuation of the whole list, not as a stock-picking score. Two unusual price-to-earnings bands and bidding versus conservative large-cap names then classify a confidence regime or a caution regime before any single trade is placed in context.
- An earningsPersistenceScreen kept a New York Stock Exchange list on names with rising earnings per share in each of the prior five years and held the roster between about 30 and 50 names by dropping stalled earners and adding replacements as the list shrank toward 30.
- The geometricAveragePe of that growth list was tested as a directional market overlay over the following 13, 26, and 52 weeks, and valuationRegimeBand cutoffs of 13 and 16 were treated as unusually low and unusually high.
- A low list-average price-to-earnings ratio was classified as a bullish market regime and a high ratio as a bearish regime. An elevated growth-company reading in the source year was presented as a cautionary signal.
- A confidenceRotation against a conservative large-cap industrial average separated cautious years 1986 through 1988, when investors favored the conservative names, from more confident years 1989 through 1991, when they bid up the more speculative growth names.
A list-wide overlay, not a stock score
This archive workflow studies a rules-based earnings-growth basket rather than a single stock. Membership followed an earningsPersistenceScreen, a rule that keeps only listed companies with several consecutive years of rising earnings per share and removes a name as soon as that streak breaks. The quantity that then labelled the backdrop was the geometricAveragePe: the central price-to-earnings reading of the screened growth list, averaged geometrically so a few extreme names do not dominate the regime label.
Editorial interpretation: that one list-wide valuation, two historically unusual bands, and a comparison with conservative large-cap bidding together classify whether the market is in a confidence regime or a caution regime. In classroom terms this is a fundamentalOverlay, a use of the diversified growth basket to classify the broader backdrop rather than to recommend any single holding, and it comes before any one trade is placed in context.
How the growth list was maintained
A New York Stock Exchange list was limited to companies with rising earnings per share in each of the prior five years. The list was kept between about 30 and 50 names by dropping members after earnings stalled and adding names when the list shrank toward 30. Earnings-per-share growth in that screened group averaged more than 20 percent a year.
A directional reading of the whole list
The geometricAveragePe of the list was tested as a directional market overlay over the following 13, 26, and 52 weeks. A low list-average price-to-earnings ratio was classified as a bullish market regime. A high list-average ratio was classified as a bearish market regime.
Unusual high and low bands
Cutoffs of 13 and 16 were treated as unusually low and unusually high. Those valuationRegimeBand marks were described as about two-thirds of a standard deviation below and above the period mean. They flagged unusually inexpensive or unusually expensive growth-market conditions rather than a recommendation for any one name.
When bidding favored caution or confidence
A confidenceRotation compared the growth-list valuation with a conservative large-cap industrial average. That cross-market comparison separated cautious years 1986 through 1988, when investors favored the conservative names, from more confident years 1989 through 1991, when they bid up the more speculative growth names. An elevated growth-company price-to-earnings reading in the source year was presented as a cautionary regime signal.
How the comparison was drawn
A comparison chart applied a 5 percent swing filter so that only price moves of 5 percent or more were plotted.
All readings on this track · 21 readings
- 1991Growth earnings and price-to-earnings as a market-regime overlay
- 1991Earnings-price reliability as a first gate for growth-sleeve construction
- 1991Growth-adjusted earnings years as construction filters
- 1992Constructing an index nominal from smoothed earnings and effective rates
- 1992Real bond yields as a deficit-share regime
- 1994Relative valuation as regime context for fund allocation
- 1995A flattening trendline as a critique of the fundamental overlay
- 1998An earnings-to-price mapping is unfinished until add, reduce, and stand-aside are rules
- 1999Regime-aware stock exposure when rates and market condition agree
- 2002Short-rate velocity regimes before tightening
- 2003A pre-trade checklist that requires rule and fundamental agreement
- 2004Evaluating P/E overlays with matched crossovers
- 2004Constructing a stock-versus-bond regime from earnings yields
- 2012Cash-rich relative strength as a pre-trade portfolio filter
- 2012Inactivity as a feature: a small-cap earnings overlay with a monthly average and weekly MACD
- 2015Evaluating a capitalization-to-output-ratio as a regime overlay
- 2016Risk-adjusted earnings yield as a portfolio overlay
- 2017Oil, yields, and implied volatility as a regime critique
- 2017When a one-year bull sits inside a secular bear
- 2018A critique of rules-only trading systems
- 2019When seasonal and policy regimes override crowd mood