Only 5% of Wall Street Recommendations Are “SELLS”

Here’s a fascinating data point:

Only 5% of the fundamental research of the brokerage firms is a sell. That’s up from 2% in the 1990s. Despite having paid $1.4 billion to settle the analyst/banking scandals of the 1990s and early 2000s, Wall Street is still disproportionately afraid of the word "Sell."

That’s rather low, when you consider how many stocks underperform their
respective indices each year.

There’s a small sign of a potential change in this attitude: Merrill Lynch: "Starting in June, Merrill will require that its analysts assign
“underperform” ratings to 1 out of every 5 stocks they cover. About 12
percent fall into that category now."

NYT excerpt:

"The bank [Merrill] analyzed stock performance over a decade and determined that from 1997 through 2007, on average, 37 percent of stocks in the MSCI world index and 40 percent of stocks in the Standard and Poor’s 500-stock index declined each year. The bank covers about 75 percent of the stocks in those indexes.

Under its new system, analysts cannot assign “buy” ratings to more than 70 percent of stocks they cover, “neutral” to more than 30 percent and “underperform” to less than 20 percent. (An underperform rating suggests the analyst believes the stock will either fall within 12 months or will rise less than competing companies with higher ratings.)

But some in the financial industry say it may be too late for research departments at Merrill or other investment banks to reclaim the credibility and prestige they lost after the technology stock bust. Hedge funds, which account for up to 75 percent of trading on some markets, conduct much of their own research and often pay twice the going rate on the Street for analysts. Many banks, by contrast, have cut research budgets." (emphasis added)

40% of the SPX? wow, that’s higher than I would have guessed.

It would be a interesting to see a longer data run — more than the 1997-2007 period, as it contained the bubble and crash period.

Also, I’d be
curious to see how many stocks underperform, in terms of their marketcap as well as their trade weighted volume
percentage on the NYSE and the Nasdaq.


Merrill Tries to Temper the Pollyannas in Its Ranks
NYT, May 15, 2008

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  1. Joe commented on May 16

    A lady from Merrill was on CNBC on this week (I think Weds. morning) explaining the new system and Mark Haines from CNBC was basically rolling his eyes and calling the sytstem confusing and laughing at it’s “complexity”. I was a little bit turned off by the whole attitude CNBC showed towards this.

  2. Jim Haygood commented on May 16

    Investment bankers are like Realtors — their one-track squirrel brains endlessly proclaim, always and everywhere, “BUY NOW, before prices go up!”

    It might be okay if they were exposed to the downside of being wrong. But now Ben Bernanke has backstopped these hucksters with public funds. Their lopsided ‘buy’ recommendations are publicly-funded speech, along with anti-tobacco ads and harangues to fasten your seatbelt. “I’m Kongressman Klodkopf, and I approved this buy reco,” etc.

    Jealous realtors doubtless wonder why they too don’t have a back-up line from the Fed. Personally I’m waiting for my Federal Reserve VISA card, with unlimited credit line at Fed Funds rate plus one percent. I’m gonna use it to get drunk, drive fast, and tear things up.

  3. VennData commented on May 16

    Would be interesting to get a comparison with broker/analysts in other developed and developing markets, if possible.

  4. cinefoz commented on May 16

    Don’t expect any changes soon regarding fear of the word ‘Sell’. Saying ‘Sell’ is like saying ‘Take your money somewhere else, we don’t know what to do with it’.

    ‘Sell’ implies you bought a bad one and they probably recommended it as a buy earlier. Why should you keep your money with people who give bad advice? The average person is a little lazy and stupid with money. They will believe your ‘shock and surprise’ when you didn’t warn of bad things that caused their portfolio value to fall. Thus, actual failure is acceptable, but thoughtful analysis that scares people is morphed into ‘I have a stupid broker who is afraid of everything’.

    At worst, the gullible will just play musical chairs with those who provide bad advice. There are no losers in the financial sales industry because of bad advice, just new accounts and only sometimes.

    Hacks on the financial channels speak of Pollyanna scenarios because they want you to bring your money to them. They know where the bucket of gold is buried, just ask them. Buying into their optimism and sales pitch is money in the bank for them, but not necessarily for the people who fall for the pitch.

    ‘Sell’ implies the stench of failure, to paraphrase Dilbert. ‘Buy’ implies ‘Winners live here and we will make you rich.’ This empty suit optimism is powering the stock market upwards at this time.

    Personally, I think the institutional investors should take a page from the price fixers in the oil and commodity markets. This is a range trader’s market and will remain one for a long time. It’s time to take profits, trash and crash the market, and buy back in when it falls to a respectable low. The empty suit optimists will power it back up quickly. Then repeat.

    Damn it, there’s more than one way to game the system, and if large numbers of people do it simultaneously, it’s not prosecutable, it’s ‘the market’ and the First Amendment.

  5. Steve Barry commented on May 16


    Oil is now over $127…I ahve no data to back it up, but I think we have to be near a point where stocks just crumble under the weight of oil…if it doesn’t happen by $150, I’ll be shocked.

  6. Philippe commented on May 16

    Wall street’s hiatus are numerous, the analysts are required to behave as good Gaussians and the markets may not.
    It is delighting to collect all the financial markets paradoxes and they should inspire a book
    « investors beware! » it is more difficult to make a spartian of a satrape than a satrape of a spartian.

  7. Steve commented on May 16

    I would be very wary of those statistics. Although I haven’t looked at the numbers, I highly doubt it was anywhere near 40% for 2003 or 2006 and probably much larger in 2001 and 2002 (ah, the beauty of averages). However, I have been known to be wrong once or twice.

  8. cinefoz commented on May 16

    Piling on, the average person rides an investment up and down. They buy winners when they are on the way up. They fail to take profits. They ride it down to a point of loss. Then it is sold.

    Thus, ‘sell’ implies ‘I’M BIG STINKING LOSER’, and no huckster wants to be associated with that.

    The average investor has no concept of taking profits, although they have heard the term.

  9. Eric commented on May 16

    Mark Haines was just staying in his CNBC character. He’s the gruff, no-nonsense straight-shooter who doesn’t brook any of that high-falutin Wall Street mumbo-jumbo. And it has made him come across like an ignorant fool on more than one occasion.

  10. Bob Abouey commented on May 16

    Steve Barry –

    This is off topic, but with regard to your previous posts on the QQQQ showing very low volume versus recent averages, have you looked at the volumes for the underlying index (^NDX on yahoo). Volume there seems much healthier, still below the huge volumes declines, but in line with averages over the last several years:


    Last 10 tr. days 2,041
    Last 30 tr. days 1,978
    Last 60 tr. days 2,105
    Last 180 2,154
    Last year 2,165
    Last 2 years 2,046
    Last 3 years 1,955
    Last 4 Years 1,903

    So last 10 days in line with 2 yr average, last 30 in line with last 3 and 4 years. Doesn’t this suggest a reversion to the mean?

    Wouldn’t the underlying index be a better measure of overall volume than just a single ETF? If so, do you still think your theory on volume weakness on QQQQ is a good short signal?


  11. The Financial Philosopher commented on May 16

    This is slightly off topic but strikes at the core of the issue:

    Why use a broker in the first place?

    It is difficult to find unbiased advice from someone who is paid by commissions and revenue sharing. Making matters worse, most (not all) brokers use these analyst ratings as guidance.

    Advisers should be unbiased to product and paid only by the client — not any other entity. They should defer to their own judgment based upon independently researched information — not the “judgment” of analysts…

    The traditional broker does not have to adhere to a fiduciary standard, either. They are only required to adhere to a suitability standard; therefore, a broker can recommend the worst performing investment in the universe as long as it is “suitable” for the investor’s risk tolerance and objectives.

    Ask for a broker’s “investment policy statement” and see what they say, assuming they know what you are talking about…

    Do your own investing or hire a “fee-only” financial planner. Period.

    “A wise man should have money in his head, but not in his heart.” ~ Jonathan Swift

  12. Steve Barry commented on May 16


    You raise good points…my StreetSmart Pro does not chart volume on NDX for some reason, so I can’t check it specifically. Volume tends to rise over time, so a reversion to a few years ago is a sign of below growth in volume. But the key point of my constant harping is that for at least a year and certainly in this latest rally, the market tanks on big volume and rises on relatively lower volume. I follow QQQQ closely, so I use it as an example…surely QQQQ is a good barometer of animal spirits. But, for example, I just eyed the stats on the DJIA…vitually the same. Out of the last 40 days, volume hit its 100 day BARELY about 4 times…the rest are quite a bit below.

    As for being a short is one of several I have blaring right now…10 day total put call is .85…Citi’s panic/euphoria model is higher in euphoria as I have ever seen it. Fundamentally, Nasdaq trades at 37 times trailing earnings??? Two times sales??? Markets tend to bottom at 10 times earnings and under one times sales. Oil is at 127…housing has to drop at least another 40% to return to means. I’m all in short baby.

  13. Steve Barry commented on May 16

    Here’s another good sentiment chart…II NYSE% Bullish. In the great market run from 2004-2007 it ranged from about 50% to 80%. In the new bear market I am betting on, I think it will range from 20% to 50%. It’s at 50% now, so that is a sell signal.

    NYSE % Bullish

  14. Bob Abouey commented on May 16

    Thanks steve, makes sense.

  15. cinefoz commented on May 16

    ‘Analyst Consensus Expectations’ are another mysterious force of nature. They are one of the forces powering the empty suit optimists and their buying.

    Being somewhat lazy, I don’t follow expectations vs. reality closely. At arm’s length, they generally come across as ‘The Stink On This Piece Of Shit Isn’t Making Our Eyes Water As Badly As We Thought It Would. Thus, It Exceeds Our Expectations.’

    I guess the magic here is having expectations exceeded. It makes me want to buy.

  16. michael schumacher commented on May 16

    “sell” has always been just another four letter word that goes with other unmentionables…….

    If I recall Enron had a buy at least 3-4 weeks before it imploded too.

    BTW Peltz didn’t get beat up enough with Wendy’s so he has to try it over with SBUX???

    Laughed my ass off with that ‘buy’ today…


  17. Steve Barry commented on May 16


    You can use a metric called on balance volume to track this as is a running total of volume that adds to the total for up days and subtracts for down days. Since early March, QQQQ has rallied almost 20%!!! You would expect OBV to be racing higher in a healthy market. yet it is right at or near the levels from early March. This is what we call a negative divergence…a data point that calls the trend into question.

    QQQQQ with OBV

  18. Francois commented on May 16

    If they don’t want to use the word “Sell” just use the expression “Buy puts”.

  19. wally commented on May 16

    I just don’t see why they cannot all be above average. This is America, after all, where the future is always good and only underpriveleged losers ever have to face the consequences of poor decisions.

  20. Greg0658 commented on May 16

    cinefoz writes “The average person is a little lazy and stupid with money”

    me now “maybe true but they have another life, its working for a living and raising the next generation of consumers”

    I’m preaching to the choir here – this all went bad when corporations and money instruments could print money, umm I mean stocks and bonds

    now if you don’t play in Wall Street you don’t get poop for return

  21. Blutskralle commented on May 16

    Credibility is a long road. ML will probably take a hit short-term for trying this. If they can actually pull it off, it could be dramatically beneficial long-term.

    However, I think human psychology conspires against there ever being a broad base of competent analysts who can get buy and sell ratings on the stocks that one should actually buy and sell. Too many underlying problems with existing theories people have bought into, herd behavior, judgment criteria for analyst performance, and the like.

    The system encourages things as they are now.

  22. Dave commented on May 16

    There are lots of good reasons why analysts have a lot more buy recommendations than sells.

    1/ Over time most stocks go up.

    2/ More brokerage clients are long than short.

    3/ Analysts don’t cover/stop covering stocks that are near bankruptcy/hopelessly falling since very few clients are interested in them.

  23. mhm commented on May 16

    The “buy/sell” rating fades over time, that is a key point.

    There is also the 1yr price target. The analyst can lower the target and keep the “buy” rating… which is a soft speak “sell”, for all purposes.

    An study correlating “buy/sell” rating and “up/down” price target would be very revealing…

  24. Ed Miller commented on May 16

    The real point is money, as it always is. Think of this as an analogy to the rating agencies that are paid by the companies they rate.

    If analyst recommendations were balanced, then a large number of companies would not bring their business to the investment house that gave a low rating. They would shop for someone who would champion their stock price.

    Analyst ratings are the means by which companies with virtual earnings sell their stock.

  25. winslow commented on May 16

    All analysts should be required by law to provide their personal stock holdings

  26. foo commented on May 16

    Will the policy survive Merrill’s failure and takeover/nationalization?


  27. Stuart commented on May 16

    When was the last time a used car salesman told you it was a bad time to buy a used car? Wall street is simply a strip mall for salesmen and saleswomen for stocks and bonds and magical pixie dust financial alchemistic creations. BUY BUY BUY!

  28. Declan Fallon commented on May 19

    “Jealous realtors doubtless wonder why they too don’t have a back-up line from the Fed. Personally I’m waiting for my Federal Reserve VISA card, with unlimited credit line at Fed Funds rate plus one percent. I’m gonna use it to get drunk, drive fast, and tear things up.”

    Grand Theft Fedo IV

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