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Analysts Turn Bullish 6-Months Late: What Does it Say About the Rally?


It may be fashionable to show up a little late for a party, but for Wall Street analysts the tendency to be tardy seems more like the rule, not the exception. And just as the S&P 500 hits its highest point since May 2008, now within 10% of its record close of 1,565 from October 2007, the thundering herd of belated bulls is finally showing up to the bash.

"We've had a monster rally since last year and analysts have been negative the whole time," says Paul Hickey, co-founder, Bespoke Investment Group in the attached video clip.

But guess what his research just discovered?

"Over the last four weeks, the revisions ratio (of upgrades to downgrades) just turned positive for the first time since early August," Hickey says.

In short, what that means is that six months and 30% later, stocks are just now looking good. While this is not the first time analysts have been on the exact opposite side of a trend, Hickey points out that, in and of itself, it does not mean the bull run is about to end. Quite the contrary.

As we have argued many times on this show, a late burst of love like this is just the thing to keep the bull intact, but it doesn't mean this inverse indicator should be ignored either.

The transition from fear to greed (or vice versa) is never perfect, nor should it be expected, but this round of conversion has been particularly sluggish, even at the start of the New Year when analysts are historically optimistic.

"When you start off the year, usually analysts are positive on equities and bullish on their outlooks, so you see some upgrades in the stocks they cover," he says. "This year, every single day until late February there were more downgrades of individual stocks than upgrades of individual stocks."

Some other observations include that on a valuation basis, this market may be overbought, but is still not overly expensive, as Hickey says "a strong rally but that doesn't change the fact that valuations are still below historical averages."

As we move forward, he says contrarians should be looking at Utilities (XLU) which have had the least revisions this year, even though their performance has been the inverse of last year when they led in a choppy, nervous market.

For sell-side believers, Hickey points out that Financials (XLF) have had the highest revision ratio, where new found love has seen this sector go from -50% last fall to slightly positive today. To a lesser degree, he says Cyclicals (^CYC), Consumer Discretionary (XLY), and Tech (XLK) also all have "positive revision traits" right now.

Will this belated bullishness mark a top or carry us to the next level higher? Let us know your thoughts in the comment section below or visit us on Facebook.