The Analyst Signal Not Seen Since 2009

Outperforming metals stocks remain underloved, while analysts adore underperforming solar and biotech stocks

Jun 9, 2016 at 2:29 PM
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Even with the S&P 500 Index (SPX) within striking distance of record highs, the analyst community remains extremely skeptical, suggesting we're far from the "euphoria" sentiment phase that defines market tops. According to Schaeffer's Senior Quantitative Analyst Rocky White, the last time the number of analyst "sell" ratings was this high was November 2009, before brokerage firms started to accept that the bottom was in place. Likewise, "buy" ratings haven't been this low since early 2010. Below, we'll take a look at some of the most despised and beloved sectors right now, and whether the sentiment is justified.

SPX Sell Ratings June 9

SPX Buy Ratings June 9

According to our internal analysis, one of the most underloved sectors right now -- as measured by the percentage of "buy" ratings -- is metals and mining, with only 30% of analysts offering up "buy" endorsements. It's also noteworthy that the average short-interest ratio for stocks under that umbrella is 9.12 -- among the highest. This, despite the fact that the sector -- measured by the SPDR S&P Metals and Mining ETF (XME), which includes outperformers Steel Dynamics, Inc. (NASDAQ:STLD) and United States Steel Corporation (NYSE:X) -- is among the best-performing of 2016. A flood of upgrades or a short squeeze could help some metals stocks extend their gains.

On the other side of the aisle, the two most beloved sectors are, ironically, two of the worst-performing of 2016. Roughly two-thirds of analysts following solar stocks offer up "buy" ratings, even though the average year-to-date deficit is 35% -- the worst of all sectors we track. In fact, the Guggenheim Solar ETF (TAN) has surrendered nearly half its value in the past year. A late-to-the-party batch of downgrades could exacerbate selling pressure on alternative energy.

In the same vein, biotech stocks have struggled over the past year, despite some fits and starts higher. The iShares NASDAQ Biotechnology Index ETF (IBB) has dropped 31.4% since peaking north of $400 in July 2015, no thanks to Valeant Pharmaceuticals Intl Inc's (NYSE:VRX) epic drop. Still, from an Expectational Analysis® standpoint, the biotech sector remains an analyst darling. A whopping 65% of brokerage firms maintain "buy" ratings, and the average Schaeffer's put/call open interest ratio (SOIR) of 0.83 indicates that short-term call options remain favored over puts. A round of downgrades or an exodus of bullish options holdouts could spell more trouble for drugmakers.

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