A Historical Look at Upgrades and Downgrades

From our database of historical upgrades and downgrades, we went back and tracked the daily number of upgrades versus the daily number of downgrades since the start of 2002.  Since January 2002, we found a whopping 32,140 downgrades and 27,528 upgrades -- indicating a slight lean toward the negative side by analysts.  Below we highlight the 50-day moving average of the daily number of upgrades minus downgrades.  Our hope was to see if any trends emerged in relation to equity markets (are more downgrades/upgrades bad/good for the market, etc.) but so far we have been hard pressed.  What we did find is that analysts as a whole tend to be seasonal in their recommendations.  Over the past few years, the number of upgrades have been more frequent during late Spring/early Summer, while the number of downgrades have been more frequent during late Fall/early Winter.  Any theories?  You can list them in the comments section below. 

To inquire about our interactive database of upgrades and downgrades, including searchable functions by stock, firm and performance, please email [email protected].

Comments

[John Hall]

I think this is a fascinating post.

I think there is a well known phrase, "Sell in May and Go Away." If you were to average out the returns over many many years, you produce a superior risk-adjusted return by Buying in November and Selling in May.

I don't know if this works for the past few years, but my reason that the analyst may have the buying/selling reversed is that they are reacting to the previous returns of the market. The markets would typically be up from November and the market looks strong by May comes along so they change their recommendations. The statistics may not support the past couple of years it being this strong.

The other possibility I can think of is if this "Sell in May and Go Away" actually is something that is feared by the investing community and they react to it by issuing more positive recommendations to keep the commissions up and keep people buying.

Finally, analysts have an institutional incentive to issue more ratings changes than if they were operating on a straight salary. More ratings changes means more revenues for the firm. Also, in the past it could have been that there were more stocks simply put on hold or not downgraded due to the relationship with IBankers. Since Spitzer changed that relationship, it could have resulted in more excessive needless ratings changes so that analysts can prove their independence.

[Justin Walters]

All interesting points, especially the second theory. We're doing a lot of things with the database we have, and we plan on looking into analyst actions and stock price reactions much more. Thanks for the comments.

[balaram ghosal]

Great post.
I see it little differently.
It looks like analysts give more positive recom. when market is down and vise versa. This way they have a better chance of being right. After all, analysts want to be right.