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Monday, August 08, 2005
Market Recap
Crude oil sets another all time high closing at 63.94 today and, as a result, many energy stocks were on the move including APA, DVN, COP, MRO, KMG, and VLO, just to name a few. This is a very strong group and continues to be a market leader as oil ascends to the inevitable $70 level. Back when oil was $45 a barrel, STHQ predicted that it would hit $70 by the end of 2005. This prediction caused us to receive email stating that I was out of my mind for making such an absurd prediction. Suddenly, that prediction is only $6.00 from becoming reality and even more surprising, $70 is all of a sudden a lot closer than a pullback to $50. Of course, as oil continued its relentless climb today, stocks took on the chin again with the DOW falling 20 points and closing just above its 50 SMA, where is could find some support. The NASDAQ was down 13 points and the S&P dropped 3 points. The FOMC meeting is tomorrow and a .25 rate hike is imminent. As always, the market will focus on the statement following the meeting. Given the recent strong economic reports lately, there is no reason to suspect that the Fed will change the language or policy from their prior “measured pace” stance. Nevertheless, the market will be on hold until the decision and subsequent release of the statement. It is anyone's guess as to how the market will react to that point. Last week we discussed The Analyst, tonight will be a follow-up to that commentary.
The Analyst, Analyzed
Many investors just do not have the time to do all of the research needed for the stocks that they want to invest in. Notice, we said “invest”. This is because, if you are a technical trader who follows charts, you do not need an analyst. An analyst's job is to figure out the fundamentals of a particular company. But short-term traders do not trade on fundamentals and therefore we do not need analysts. However, we do have to be aware of what an analysts says about a stock that we have a position in because the crowd will always react to the analysts statements.
There is a vast amount of information about companies and the average investor does not have the time to do the in-depth research required before they invest in a particular company, this is where analysts come in. These individuals are supposed to be providing investors with research on particular companies and have the best interest of those investors in mind. But do they really? What is the real reason they are there? They are there for the investors alright, just not the small main street investor. Their sole purpose in life is to be there for the big institutional Wall Street investors, not the average investor on the street. However, the average investor does not know this fact and thinks that they are on a level playing field with the big boys when they follow the analyst's recommendations.
Increased popularity of analyst ratings over the past several decades has expanded the influence of these ratings on the price of stocks. The slightest change in an analyst's rating on a particular stock can send the stock rocketing higher or spiraling downward on a whim. Analysts have power; too much power in our opinion but it is what it is and we must respect that power, regardless of whether or not we believe in the analyst. Analysts have many conflicts of interest and this is why the small investor should never believe in them. Tonight, we will attempt to explain the different types of analysts and what exactly drives each analyst's recommendation.
Three Categories of Analysts:
1) Buy-side Analysts
They are employed by large institutional investment firms such as mutual funds or insurance companies. They offer recommendations on stocks in their employers' accounts. These analysts focus their research on specific sectors or stocks that are of interest to the investment firm. These reports are mainly for internal use.
You do not hear much about these guys, they are behind the scenes but they are the ones to listen to if you can get to them.
2) Sell-side Analysts
These are the ones to be aware of. Employed by broker dealers and investment banks, they work in the retail investment division. Their recommendations and ratings are created for the purpose of selling an investment to clients of the brokerage firm. The reports issued by these analysts are for public disclosure. These are the ones that you see on all of the stock channels pumping up stocks. Beware!!!!
3) Independent Analysts
These analysts are not employed or associated with any specific brokerage or company. Independent analysts provide unbiased and objective ratings and they receive compensation either from the companies they research or by selling subscription, based reports.
Conflicts of Interest
Investment banking relations are one of the most significant areas of conflict of interest for analysts. Investment banks are financial institutions that perform underwriting services. They also intermediate between an issuer of stock or bonds and the investing public. When a company decides to go public (IPO), it will obtain the services of an investment bank to facilitate the process and sell the new stock to investors. Consequently, an analyst may face a conflict of interest because, if the analyst of a particular stock works for the same investment bank underwriting that new stock, then they may be inclined to give positive recommendations to ensure that the offering is successful. Also, stock ownership is another conflict of interest for the analyst. Through direct ownership or through a pooled stock purchase plan, analysts and employees of the investment bank may own the very stocks that they are recommending. Analysts then may be reluctant to issue poor reports or recommendations on a stock that they own.
We have very little faith in the analyst for the several reasons mentioned. The next time you hear about an upgrade or downgrade form some analysts, ask yourself, “Does this analyst really have MY best interest in mind?”
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
Stockcharts Listing
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http://stockcharts.com/def/servlet/Favorites.CServ...
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