Analysts Are Losing Faith … Should You?

Last week, I took an in-depth look at the Investors Intelligence (II) sentiment survey.  That analysis showed a lot of published stock market advisors were bullish on the stock market, and very few were outright bearish.  This week, I'll try to gauge the sentiment from brokers. 

The data comes from Zacks and shows the number of "buy," "hold," and "sell" recommendations for each stock.  I aggregated the data to see the total percentage of "buy" recommendations.  The assumption is that when the total percentage of "buy" recommendations is high, brokers are bullish.  When it's low, they are bearish.

Total Percent "Buys":  Here's a chart of the S&P 500 Index (SPX) going back to 1996, along with the percentage of "buys" for SPX components.  Note that the stocks used are current stocks in the S&P.  Ideally, I'd like to use the stock components on the record date, but unfortunately I don't have the list of stocks for each date, and getting that data would be more work than it's worth.  However, I'm confident the chart would not change too significantly if I did have that data. 

As you can see, at the height of the tech boom, over 70% of broker recommendations were "buys." Brokers were essentially telling you to buy anything; you were bound to make money.  That all changed, of course, after the crash.  Since then, the "buy" percentage has never come close to that level, ranging from 44% to 58%.  Currently, for S&P 500 stocks, 51.2% of recommendations are "buys."  

Below is the same chart, but zoomed in to show just the last 10 years.  The percentage of "buys" peaked in late 2011, and despite the strong stock returns since then, the number of "buy" recommendations is declining.  From a contrarian point of view, the waning optimism among brokers, juxtaposed against the upward trend of the market, is a very bullish sign.