This Is What Happens When Analysts Become Ostriches

Editor's note: The right system can give you an edge over other investors – and help you ignore the "noise." That's why our friend Marc Chaikin built the Power Gauge. At our corporate affiliate Chaikin Analytics, they use this tool to unearth danger spots in the market (and a lot more). Today, Marc's system says to avoid two plummeting sectors, despite what the Wall Street analysts say...

With so many "buy" ratings today, it's like Wall Street analysts have become ostriches...

They're sticking their heads in the sand.

Analysts held 10,708 ratings on S&P 500 Index stocks in mid-June, according to a report from financial data and software company FactSet. Of that total, 56.9% were "buy" ratings, 37.7% were "hold" ratings, and only 5.4% were "sell" ratings.

And the thing is, even though we're mired in a bear market right now... that breakdown was almost spot on with the five-year averages. The five-year averages are 53.3% for "buy" ratings, 40.7% for "hold" ratings, and 5.5% for "sell" ratings.

That brings up a worrying question...

What are these analysts seeing – or rather, not seeing – in the market today?

And that concern isn't even the worst part of the data. Analysts are so far behind when it comes to a couple of market sectors, it's frightening.

Let me explain...

A sector-level look gives us an idea of what's wrong with these Wall Street analysts today. Their ratings reveal a profound lack of understanding of the current market dynamics.

These analysts had "buy" ratings on 65% of stocks in the information technology sector, according to FactSet. And they had "buy" ratings on 61% of stocks in the communications sector.

Analysts are most optimistic on these two sectors (as well as energy at 64% "buy" ratings). But the thing is... these two sectors have performed the worst during this bear market.

The Technology Select Sector SPDR Fund (XLK) tracks the information technology sector...

Our Power Gauge system at Chaikin Analytics downgraded XLK to "neutral" on January 5. At the time, it traded at more than $168 per share.

As our chief market strategist, I review various ratio charts for a select group of our subscribers each week. And on April 6, I told folks to continue to avoid the space despite a rally over the previous few weeks. XLK traded for around $155 per share at the time.

The exchange-traded fund closed at about $130 per share on Wednesday. That's a roughly 23% decline in about six months since the Power Gauge's downgrade. Take a look...

Despite that abysmal performance, Wall Street analysts continued to hold "buy" ratings on roughly 65% of these stocks. It's crazy.

How far must tech stocks fall before the analyst community downgrades the sector?

The Communication Services Select Sector SPDR Fund (XLC) is in a similar position...

The analyst community recently rated 61% of the stocks in this sector as a "buy." And yet, the evidence doesn't support that outlook...

The Power Gauge downgraded this sector from "bullish" to "neutral" on November 1, 2021. That day, XLC traded for around $80 per share.

Then, in our weekly sector review on November 17 for the same group of subscribers, I downgraded the fund as well. It traded for about the same price as it had two and a half weeks earlier.

Now, XLC trades at roughly $56 per share. That's a decline of about 30% in eight months... an incredible drop for an entire sector. Take a look...

The analyst community simply lacks the capacity to update their ratings as dynamically as we can with the Power Gauge and in our daily insights. And right now, investors are paying the price.

It's hard to say exactly why Wall Street analysts often get things so wrong. Maybe it's because their jobs depend on an outlook that motivates investors to buy.

Whatever the reason is, these analysts will fail you as an investor. Their full-tilt "buy" ratings while investors are getting crushed proves that.

Don't look to Wall Street for answers today. Avoid these plummeting sectors.

Good investing,

Pete Carmasino

Editor's note: Don't be surprised by a major move in U.S. stocks again this year... Chaikin Analytics founder Marc Chaikin recently came out with a big prediction for the rest of 2022. He says the market conditions we're seeing now are creating a unique opportunity, with the potential for multiple 300% to 500% winners... Plus, he reveals the next beloved stock that his system says is likely to crash. Click here for the details.

Further Reading

"The key to investment success is much bigger than any one measure or signal," Marc Chaikin says. But the "pros" on Wall Street always seem to be one step ahead. That's why Marc created an incredible system to help individual investors keep up... Get the full story here: The Four Main 'Ingredients' to My Life's Work.

In today's volatile market, your biggest winners could tank at any moment. That's why it's crucial to have the best tools at your disposal to determine your next move... Learn more here: This 'Too-Easy' COVID-19 Trade Plunged 52%.