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Are Analyst Ratings Confirming the Bull Market?

Schaeffer's Senior Technical Strategist uncovered one more reason not to doubt the upswing in equities

by 8/14/2012 9:57:50 AM
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As we've been saying for years now, this market is headed higher for two reasons: First, price action continues to be constructive; and second, overall expectations are still too low. Remember, lowered expectations make it much easier to have good news and thus, buying pressure.

Here's a list of a few of the bigger-picture things I've noted recently as reasons to look forward to higher prices.

These examples have all occurred over the past several months. Let's take a closer look at this. We have Wall Street avoiding stocks, we have Main Street avoiding stocks, and we even have the potential for a whole generation of stock investors who think the whole thing is rigged. Yet, the Dow Jones Industrial Average (.DJI) is about eight percentage points away from a new all-time high! Simply amazing when you think about it.

Today, I want to take a look at another group that has potential longer-term contrarian bullish consequences: analysts.

As amazing as some of the stats above are, in terms of simply avoiding a strong bull market, this one might be even more incredible. As it turns out, while the market gets stronger, analysts are actually getting more bearish. Back in early October, when the S&P 500 Index (SPX) was down near 1,100, there were 57% "buys" from analysts' ratings on SPX components. Well, with a market that is up more than 25% since then, and a few good days away from new multi-year highs, this figure has dropped more than 3.5%! I have no clue how this ranks as a short-term indicator, but from a longer-term perspective, I find this to be yet another reason to expect this rally to continue.

Chart of S&P 500 Index (SPX) Versus Percentage

The data since 2000 shows the percentage of "buys" has been slowly increasing since the 2009 lows. In fact, it did recently breakout to its highest level in a decade. So, one could argue that some optimism is slowly creeping into the picture.

Chart of S&P 500 Index (SPX) Versus Percentage

However, from a much longer-term perspective, analysts are still nowhere near as bullish as they were at the 2000 peak. Back then, this ratio peaked at 73%. Remember, markets peak at euphoria and bottom at despair. To me, we aren't in despair anymore, but we sure aren't anywhere close to euphoria. Once again, the data confirms this and should bode well for continued gains.

Chart of S&P 500 Index (SPX) Versus Percentage


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