Market Indicator for the Week Ending February 25, 2011

Introduction of the Market Indicator

There has been plenty of underlying strength that has been driving the stock market rally. The U.S. economy is in much better shape to withstand the oil surge than has been the case in past months. The fourth quarter GDP strength, which will most likely get revised upwards later this week, has continued in the current quarter. The ISM indices, the Philly Fed survey, leading indicators, and even jobless claims all bear this out.

While the Middle East situation, particularly Libya, may produce a temporary air of tentativeness in the market, its ability to pull the market down in a more enduring fashion is limited.

Analysts Ratings

Therefore, let us move forward to more positive aspects of the stock market and check out the ratings doled out by Wall Street analysts have deemed feasible. This market indicator is a good way to assess sentiment. Bear in mind, although they are professionals, analysts have a tendency to be behind the curve in predicting stock prices. By looking at where analysts stand on a sector-by-sector basis, and measuring how those stocks have performed during the last year, may reveal some sectors where analysts are behind the curve, and tell us which sectors may outperform going forward.

Percentage of "Buys" by Sector

In the analysis below, the S&P 500 Index (SPX) stocks are grouped by sector, and found the percentage of "buy" recommendations as of one year ago to compare with the current analyst ratings configuration. The median return of the stocks within each sector is also outlined. The last column shows the difference in percent "buys" from one year ago through today. A positive number means Wall Street analysts have become more bullish on that sector, while a negative number means they've become more bearish. By measuring the sector's performance by the median one-year return of the stocks within that sector provides us with the table below, which is sorted with the best-performing sector at the top, and the worst at the bottom.

By looking at the table above for sectors that have had very strong returns, we can see that within this market indicator, analysts have not scrambled to become more bullish. Electronics and semiconductors both fit under the wider umbrella of tech stocks, and both of those sectors share this trait. Semiconductors are especially obvious. It's one of the top-performing sectors by median return, but analysts have become even more bearish on the group over the last year.

One year ago, 51% of analyst recommendations were a "buy," and today, just 46.5% of recommendations are a "buy" within that sector. The pessimism shown by analysts toward this technically strong sector has very bullish implications.

Plus, compare the semiconductor stocks to a couple of sectors at the bottom of the table. Aerospace/airline companies and the Wall Street sector have significantly lagged the market during the past year; with a median return right around 15% (remember, the SPX is up 25% over this time frame). However, analysts have become even more bullish on those sectors, with the percentage of "buys" going from about 48% to the upper 50s year-over-year.