Dire Warnings About Analyst Calls During Bear Markets and Broad Sell-Offs

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The recent stock market carnage simply has one underlying but painful explanation after adding up the multiple reasons behind it. It’s a bear market.

This does not necessarily mean that the aging bull market of almost 10 years has come to an absolute end. It also doesn’t mean that the indexes will not return to new all-time highs in 2019 or beyond. There are many instances when there are bear markets within long-term bull markets. After all, stock market indexes have an entire history in which the most likely outcome is that the major indexes will rise over time. That doesn’t make the pain of short-term losses feel any better while a bear market is unfolding.

Wall Street and Main Street sometimes do not see eye to eye. During bear markets, there is a “go-to” source of blame by Main Street — that’s to blame Wall Street. After all, most of the public knows very little about short selling, buying or selling options, and what “going long volatility” really means. And by the time the public figures it out, it’s either too late, too costly to transact or just feels too expensive on the surface.

24/7 Wall St. covers many analyst calls each day of the week. These are generally variations of Buy, Sell or Hold ratings. While the effort is intended to help investors and traders find new trading ideas, the reality is that analyst calls at certain times can shake investors out of positions or trick them into staying in a position for far too long. And there are also instances when certain stocks get pounded day after day on the same sort of report from analysts on Wall Street, as if they were students passing out each other’s homework and turning it in a day later.

Since the market has been acting like a bear market toward the end of 2018, the investing public needs to at least consider certain dire warnings about many analyst calls. Sometimes analyst calls simply cannot be trusted or they just refuse to deal with the reality of a bear market. A stock that has fallen to $150 from $300 is not automatically a “Screaming Buy” and it is not always a “value stock” just because its price tanked. During the 1990s and early years after 2000, often analysts would literally issue “pounding the table” reiterations of their Buy and Outperform ratings when a stock would trade lower.

Some investors wonder about the usefulness of analyst calls, and they really bring this issue into question during bear markets when the overall market, sectors and certain stocks just fall apart. It’s not that analyst calls are worthless, nor is it that analysts have harmful intent. The issue is that analysts, just like the investing public, expect the stock market and share prices to rise over time. In fact, they count on the markets rising over time.

At a mature stage in a bull market, which we have been in for all of 2018, investors should expect newly issued analyst calls with Buy and Outperform ratings to come with expected upside targets of 8% to 10% in most Dow Jones industrial average and S&P 500 stocks. Some analysts will become more aggressive on new calls, but where analyst price targets become convoluted is when the stock market, a sector in general, or even an individual stock keeps going lower each day for generally the same reasons. That’s bear market trading for you.

What happens in many instances is that analysts will maintain their Buy and Outperform ratings while lowering their price targets. Sometimes this happens in multiple waves, and it can be quite painful for investors. After all, investors keep hearing “Buy” on something that has drifted ever lower.