Stocks are leading indciators because price of current earnings have been priced into stocks and then you pay a premium for stocks with more potential profits and get discount on stocks that have poor forecasts. e.g. You hold COP and where has it gone after reporting a stellar quarter recently and why is it back at 63 now when its recent earnings have been absolutely phenomenal? GM has been reporting huge losses but have done well in the last quarter or so, why? Tech and Semi stocks reported stellar current quarter earnings last quarter but fell further back because they lower earnings forecasts. Housing stocks have been doing terrible since 2005 because market had sensed the housing collapse much earlier than actual home owners.
It is the game of expectations on Wall Street and sometimes it makes sense to just follow the momentum/trend. At times of economic uncertainty, investors get more attached to future forecasts then what a company reported last quarter.
