"Bearish" AFTER a Stock Loses Most of Its Value?

By: Robert Folsom | Thu, Sep 23, 2004
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In mid-September (Friday, Sept. 10), The Atlanta Journal-Constitution ran a story on its front business page under this large headline:

Analysts Bearish on Delta

The article was about the woes at Delta Air Lines, which had grown so severe that "some Wall Street analysts" had turned bearish toward the company.

There's no mystery to the story's appearance; the newspaper was doing its job. Atlanta is Delta's home, and the Journal-Constitution is the city's hometown paper. Delta's financial health is a newsworthy issue for tens of thousands of people in the region.

And, as is typical in stories like this one, the newspaper was not giving its opinion of Delta ("bearish"), but that of people supposedly in a position to know -- "analysts" who were duly quoted in the article.

So the question becomes, was this news useful? Did Wall Street help Delta shareholders know what to do? Would they think this information arrived just in the nick of time?

I could be up all night writing out the answers to these questions, but then again, why use words when the price chart tells all?

So, I suppose this answers the "nick of time" question. On the morning the story appeared, Delta (DAL) fell to an intraday low of 3.55, a few cents from its lowest share price ever.

With the chart in mind, here's another question: If you were a shareholder, at what price level would YOU have wanted to know that analysts had decided to turn "bearish"?

What's more, wouldn't you like to know how large a group of analysts had turned bearish on Delta? I was intrigued that the story had said "some" Wall Street analysts, so the following Monday, on September 13, I actually looked up two separate lists of analysts' ratings. What I found made me think that the newspaper could have said more accurately, "We managed to find a Wall Street analyst who is willing to be named in print as being bearish on Delta."

Why? Because in both cases, the ratings "consensus" had barely changed from where it was a month, three months, or even a year ago. A clear majority always listed Delta as a "Hold," "Buy," or "Strong Buy." A much smaller percentage listed the stock as a "Sell" or "Strong Sell."

Here, I'll be as generous as possible and say that these ratings were, well, a little off. And if this example of Wall Street ratings seems to remind you of a bad dream you used to have, humor me for reminding you that while it was indeed bad, it wasn't a dream.

In April 2003, 10 major Wall Street brokerages agreed to pay $1.4 billion to the Securities and Exchange Commission, to settle allegations of biased stock ratings. Call me sentimental, but when Wall Street had to pay $1.4 billion for issuing biased stock ratings ... wasn't the idea to make Wall Street stop issuing biased stock ratings?

Someone could say that these ratings don't matter. Well, something persuaded a lot of investors and institutions to buy Delta. During the past three months, institutional shares purchased ran nearly two-to-one ahead of shares sold (34.2 million vs. 18.3 million). During this period, Delta's shares lost more than one third of their value.

Which brings us to one last irony worth noting, which unfolded on Monday, September 13. That was the first trading day after the Journal-Constitution story which announced "analysts bearish on Delta."

Delta opened trading that session at 3.76 and closed at 4.13 -- a one-day gain of 10 percent.

If the "analysts" who cover a stock turn "bearish" only after a stock loses most of its value, what's the difference between them and the average investor who throws in the towel long after it's too late?

Nothing, because psychologically there is no difference. The story of this one stock is the same story the stock market overall will tell, in the emotion of individual investors and financial professionals alike. They will remain bullish all the way down, until it is indeed too late.

And while I'm not claiming that "the low is in" for Delta's share price, you can know that when Wall Street and the average investor alike turn extremely bearish on stocks in general, the long-term bear market low won't be far behind.

When you understand that psychology, you can know the story's end from the beginning -- and you can put what you know to work for you.


Robert Folsom

Author: Robert Folsom

Robert Folsom
Elliott Wave International

Robert Folsom is a financial writer and editor for Elliott Wave International, a financial analysis company. He has covered politics, popular culture, economics and the financial markets for 19 years, and today writes EWI's popular Market Watch column. Robert earned his degree in political science from Columbia University in 1985.

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