Listening to Stock Analysts Can Be Costly

Why are stock market analysts so wrong so much of the time?

Aug. 18 (Bloomberg) — Anyone who did what Wall Street analysts advised last March has only losses after the biggest stock market rally in seven decades.

Citigroup Inc., Bank of America Corp. and more than a dozen other firms told clients to purchase European energy producers and U.S. drugmakers while selling banks and retailers, according to combined rankings compiled by Bloomberg. An investor who used $10,000 to buy companies in the highest-rated industries and bet on declines in the lowest since the advance began on March 9 lost everything and would owe as much as $6,000 to cover bearish trades, the data show.

The recommendations didn’t work because companies with the worst earnings led the 46 percent gain in the Standard & Poor’s 500 Index since it fell to a 12-year low five months ago. Securities firms that failed to foresee that the hardest-hit stocks last year would recover fastest steered investors to drug and energy producers, which have trailed the MSCI World Index by more than 24 percentage points, the data show.

“Analysts are attached to fundamentals,” said Romain Boscher, who helps oversee $18.5 billion as head of equities at Groupama Asset Management in Paris. “This is a technical rally, a rally of sentiment. Analysts were too defensive. There was an inflection point and they didn’t see it.” See full story here.

By the time stock market analysts research and write up a report the news is already discounted  in the stock. As a fundamental analyst you are often constrained by a risk oversight committee that filters, caps or modifies your research.

Having a technical analyst on the other hand, such as a Chartered Market Technician (CMT) who studies things like trend turns, volume characteristics, relative strength, can help tell you what is happening not what has happened.

This entry was posted on 19. August 2009 at 01:10 and is filed under Technical Analysis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.