If analysts ever had a true grip on the market, one might expect that their "Sell" ratings of stocks or ETFs would come near market highs. Similarly, one might expect that their "Buy" ratings would come closer to market lows. After all, the idea behind ratings is to buy lower and sell higher... isn't it?
However, stock and ETF ratings are notoriously late. First Call/Thomson Financial found that in the first 4 months of 2000, at the height of the previous bull market, less than 1% of stocks had a "Sell" rating by analysts.
That's right! Some 99% of stocks were worth holding or buying more shares!
If analysts are supposed to help you get out of stocks before they spiral downward, shouldn't 99% of stocks have been rated as "Sells" in 2000? Shouldn't there have been better guidance BEFORE the 2000-2002 bear?
I don't have the data on how many "Sell" ratings existed at the height of the more recent bull market that culminated in 2007. That said, if I had to "guesstimate," it was probably less than 5% of stocks and ETFs.
So here's the curious case of investing our Benjamins here in 2008. What do we make of the scores of "telev-analysts" who currently preach the possibility of further market deterioration? What value should we assign to the Street.com rating 14 of 15 "toddler" ETFs(i.e., those that are 1-year olds) as "Sells?"
Street.Com Ratings For New (1-year) ETFs
Market Vectors - LB AMT-Free Intermediate Muni (ITM) Buy
iShares JPMorgan USD Emerging Markets Bond Fund (EMB) Sell
Vanguard Extended Duration Treasury ETF (EDV) Sell
iShares MSCI Japan Small Cap Index Fund (SCJ) Sell
Vanguard Mega Cap 300 Value ETF (MGV) Sell
iShares S&P Global Infrastructure Index Fund (IGF) Sell
Vanguard Mega Cap 300 ETF (MGC) Sell
PowerShares S&P 500 BuyWrite Portfolio (PBP) Sell
iShares MSCI Kokusai Index Fund (TOK) Sell
Vanguard Mega Cap 300 Growth ETF (MGK) Sell
iShares MSCI EAFE Small Cap Index Fund (SCZ) Sell
PowerShares DWA Developed Markets Technicals (PIZ) Sell
Claymore/AlphaShares China Real Estate ETF (TAO) Sell
PowerShares DWA Emerging Markets Technicals (PIE) Sell
PowerShares FTSE RAFI International Real Estate (PRY Sell
Correct me if you think otherwise, but analyst ratings have always been meaningful- just not the way that they were intended; that is, the more the analysts suggest a stock or ETF as a "Buy," it's probably time to think about locking in some profits. Similarly, when the analysts finally scream "Sell" across the entire stock market landscape, you're probably looking at a lower risk entry point for purchase.
This is what contrarian investing is all about. The majority of the investment gurus are lifting up the yellow flag or even flashing the red light. You might want to think a bit like Warren Buffett, who emphatically talked about buying in mid-October 2008. (And in spite of the turbulence since, the major indexes are not much lower or higher than when Warren first spoke up.)
Even as you hear investment advisers talk about their clients on CNBC or CNN, you hear the nearly complete shift from irrational exuberance to irrational fear. Nobody is asking to make money... everyone wants NOT to lose more!
Fair enough. We can't know with precision when the markets will rally, and caution may be warranted if for no other reason than the volatility is too much to ask of scared investors.
But Warren Buffett can't be the only one out there who tries to be greedy when everyone is fearful... is he? Where have the contrarians gone? Is Jamie Dimon, CEO of JP Morgan Chase, the only person who believes his stock price is trading at a 50% discount?
All I know is this: Too few analysts recognize when it's time to call it a day. They're late with those "Sell" calls. Worse yet, they're late with the "Buy" decisions... which usually wind up occurring after the markets have recovered in dramatic fashion.
Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.