Weekly Street Sentiment: Sell-Side Doesn't Believe in the Rally

Includes: DIA, GS, QQQ, SPY, XLF
by: First Coverage

Derived from the aggregated analysis of thousands of actual trade ideas and data being sent in real-time from the sell-side to the buy-side, the First Coverage Weekly Street Sentiment provides a snapshot of market trends and a unique perspective of the mindset of the Street for the week ahead. The following data has been extracted directly from all information transmitted in the past week by sell-side representatives from more than 250 firms submitting information to portfolio and asset managers across North America via the First Coverage platform. 


(Monday, September 22nd)  

    • Sell-side feels, at least for the near future, that the worst is behind Financials.

    • Sell-side doesn’t believe end-of-week market rally is for real and are indicating that trouble still lies ahead for broader markets.


Do you believe? 

A phrase more likely to be found in places of worship, in moments of prayer or times of internal reflection, is probably the most important and appropriate question being asked on Wall Street. Do you believe that the trillion dollar bailout is enough to restore confidence? Do you believe that the worst is behind us? Do you believe that the market is fixed? (And by fixed, we mean resolved…not that other meaning.)  

So, do you believe? The answer by the sell-side… Not really.  

First, the sell-side feels, at least for the short term, that the worst is over for the Financial Industry. Second, and surprisingly, they are unconvinced anything that happened last week is going to make a bit of difference to the longer term health of the overall markets. 

To illustrate this, we’ve included two graphs below. The first shows the change in the sell-side’s sentiment towards the financial industry over the last week, while the second shows the sell-side’s change in sentiment towards the overall market during the same time period. 

You can see in this first chart that the sell-side actually started suggesting to their buy-side clients mid-Wednesday afternoon that it was time to start buying Financials. 

This shift in sentiment happened well before the government bailout package was announced and clearly at a point where the sell side felt the ‘financial babies were getting tossed out with the financial bath water.’  

The most recommended stock within the financial industry last week was Goldman Sachs (NYSE:GS). Over 75% of the week’s bullish ideas on GS were sent to the buy-side pre-bailout between 11:30 a.m. Weds and 2:00 p.m. Thursday when the price was sitting around $100, well below the $129 where the stock finished the week.  

Not surprisingly, the bailout and short-selling restrictions announced Friday morning did generate an exponential increase in bullish sentiment but it’s clear by the data that this bullishness built upon a shift that was already occurring in the marketplace, and already being noticed by First Coverage users.  

Now take a look at the second graph that depicts the sell-side’s feelings towards the overall market. Here’s where things get really interesting… 

The institutional sell side feels the overall market is no better off now than it was before last week started. They like the concept of the bailout, and how it relates to the Financials. They even thought it sounded good at first glance for the overall equity market. However, the longer the sell-side thought about things, the more they felt this wasn’t going to be the solution to the market’s woes. 

The sell-side officially lost their enthusiasm for this new reality about 9:40 a.m. on Friday morning and went into the weekend feeling the same bearishness as they did at the start of the week.

What does all this mean? Hard to say, but important to note that while the overall First Coverage Sell-Side index and the S&P 500 ended the week pretty much where they started, the market got there by going down and recovering into the end of the week while the First Coverage Sell-Side Sentiment Index got there by going up ahead of the market rally and then falling off dramatically as we headed into the close on Friday.  

The institutional sell-side, unlike the overall market, clearly feels that while Financials have been momentarily spared by last week’s actions, this market as a whole still holds no safe havens. The sell-side is telling their buy-side that risk still exists and even though Financials are in better shape than before (thanks to the bailout) other industries, for example Consumer Cyclicals (now the most bearish by sentiment) are likely to bear a disproportionate share of that risk. 

The one clear thing we can say is that over the next few weeks, between what the market thinks is going to happen and what the sell side thinks is going to happen…someone’s going to be right and someone’s going to be wrong. 

Until next week... 


On September 15th: “Basic Materials jumped dramatically from bearish territory, to nearly bullish territory over the last week.”  

What’s happened since: Gold moves over $100 to the upside.