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| Upgrades and downgrades. What is really going on? |
| How best to interpret the battle of the analyst upgrades and downgrades |
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| Analyst are constantly reviewing and looking for company news and info. so that startegizing can begin. When they have a view on the company or some news to broadcast they will make their upgrade or downgrade coverage announcements. Why? Think about this for a minute. All the financial brokerage houses obviously are in business to make money. They have major clients that they may have recommended to buy or sell a particular stock but quite frankly isn't performing the way they thought or they may be looking to reduce or increase some of their house account positons. KEY STRATEGIES Selling into strenght, buying into selling pressure Whatever the case when they make their upgrade they are already holding their positions, anticipating that the upgrade hype will cause the share price to move higher thereby giving them an opportunity to sell into strenght. Yes selling into strenght, that's really the opportunity an upgrade provides. You don't really think that when they upgrade that they themselves are buying in at that time? No, No, No, upgrades and downgrades are trading strategies geared to move a stock's share price. On the other side of the coin, when an analyst downgrades a stock, you don't think they are holding positions at that time. So what are they doing? Downgrades can open a number of trading strategies a few are: 1.)The firm may be holding short positions. 2.)While they would like to purchase the stock they feel the current share price is overextended (ex.based on the company's current business projections) and are hoping the downgrade will bring in some sellers to move the share price down. Giving themselves the opportunity to initiate new positions. 3.)There are a lot a leveraging type moves that are done with call/put options. The thing about upgrades and downgrades is that by the time the small investor gets it, it's pretty much old news. What can be even more confusing is when you get two different brokerage houses making announcements in the opposite direction for the same stock, one an upgrade the other a downgrade. What a farce ! What's really funny is when a company announces earnings (either missing estimates or just generally poor earnings) the stock gets hammered and then an analyst steps in afterwards and announces a downgrade. ( give me a break! it makes you wonder about the credibility of the analyst) However even the analyst sometimes are caught off guard, for example; a company reports some unexpected bad news, the stock sells off - then a analyst steps in to upgrade the stock. Don't get me wrong sometimes this can be viewed as simply trying to mute the overeaction, but also it can be said that this is a strategic move to create a short lived price rise for some lightening or existing positions. So what's a small investor to do. Realize upgrades and downgrades for what they are and that share price momentum caused by them can be short lived. So if you are trying to buy or sell short into these momentum moves you need to be aware of: 1) Is the stock in a overbought or oversold condition. 2. Where is the share price in relationship to it's key moving averages (13, 25,50, 200 moving averages.) 3. Where is likely resistance and support located at. 4. Is volume starting to dry up? Not keeping an eye on any of the above will most likely result in you buying in at the current cycle high or selling short at the low. (obviously not good positions to be in) So what if your holding the stock that receives an upgrade. Great! Take the ride , however keep an eye on the technical's and consider existing into strenght and re-entering on a subsequent pullback. What if your holding a short position and that stock gets a downgrade. Great again, however with this be a little more careful. I would close out my position on the initial emotional move and take my profits. Why ? On bad news the seller's generally overeact making the first move the worst. After that however you start to get some bottom fishers looking for entry points. Whether they are right or wrong doesn't matter, the point is bottom fishers can move the share price back up thereby causing you to lose some profit potential from your short position. One last note, whether your on the buy side or sell side, be sure to use protective buy and sell stop orders to protect against any downside or upside risk. There are many good sites on the internet to gets the lastest in upgrades and downgrades. Two of my favorites are the ones offered at earnings.com where they have a history feature for upgrades downgrades as well as plot them on a calendar...Great Tool! Another good site for upgrades and downgrades is the free area of briefing.com , also available at this site is a very useful splits calendar and a continually updated story stocks section. a few other links to try Barcharts signals upgrades and downgrades dailystocks quicken.com |
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