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Take a Minute to Sharpen Your Stock-Hunting Skills

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Why adding analyst ratings to your trading arsenal could prove to be profitable.

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At Schaeffer's Investment Research, we focus on a myriad of sentiment indicators. One of these quantitative measures is analyst ratings. Now, these folks are generally moving in lockstep with each other, are slow to react, and generally tend to be a group that can sometimes be faded. Earlier this month, my colleague Ryan Detrick touched on how analysts become more pessimistic as markets strengthen. As you can see in the chart below, since the October bottom, the S&P 500 Index (SPX) has moved inversely to the percentage of analysts recommending to buy stocks. Given the strong rally we've experienced, I think this is a pretty incredible chart.

s&p500-stocks

Taking it one step further, let's take a look at the current analyst ratings on a sector level. Below, I've simply ran a study showing the percentage of stocks in each sector that are above their 200-day moving average, and the total percentage of analysts rating the stocks within that sector a "buy." These are then sorted by the largest to smallest difference between the two percentages.

As you can see, financial names and housing related stocks are topping the bullish list, and basic materials and commodities-related stocks are topping the bearish list.

Looking at the charts, there are several homebuilding names that look pretty attractive, and I'm starting to see more and more financial names that are breaking out above former resistance. Although not included in this study, short interest has been quite high on homebuilding stocks for quite some time, and we have been seeing big jumps in shorts betting against financial shares.

sectors-with-strong-price-action

sectors-with-poor-price-action

Pretty simple study, huh? Well, sometimes it pays to keep it simple. While this screen doesn't give me an exact buy or sell signal, simple studies like these can often provide a decent starting point for stock hunting.

This article by Joe Bell was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
No positions in stocks mentioned.
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