The pace of "sell" recommendations by Wall Street stock analysts picked up this year--from almost zero to slightly more than zero.
But this week, investors realized that a "sell" signal may be as useless as a perpetual "buy."
A Merrill Lynch analyst on Tuesday issued a "sell" recommendation on pharmaceutical giant Merck--a bold statement about a blue-chip firm by a dominant broker. Later in the day, he withdrew the recommendation and said he was "neutral" on the stock.
The flip-flop, unprecedented in the memory of several experts who follow analyst ratings, signals what may be in store next year, as Wall Street tries to boost its credibility with investors.
According to Investars.com, an independent research firm that tracks analyst recommendations, 1.1 percent of current ratings on stocks by 96 brokerage firms are recommendations to sell.
A year ago, just 0.6 percent of brokers' calls were "sell."
Thomson Financial/First Call said 2.4 percent of the 25,000 recommendations in its database were "sell" or "strong sell." That's up from 0.5 percent last December.
Since the collapse of such popular stocks as Enron, WorldCom and Tyco, brokerage firms have pledged to present a more balanced spectrum of "buy," "sell" and "hold" recommendations.
Independent research firms, which don't engage in investment banking services for companies, have less of a problem saying "sell."
Twenty-five percent of the current ratings by eight independent firms are "sell," up from 12 percent a year ago, Investars.com said.
As brokerage firms, such as Merrill Lynch, seek to diminish the perception that their analysts merely do the bidding of corporate clients, a new dynamic will arise in the world of "buy," "sell" and "hold."
"In some ways, analysts have been empowered," said John Eagleton, president of Investars.com. Analysts may find their compensation based on the accuracy of their recommendations. That would be progress.
The independent analysts Eagleton tracks produced an aggregate 4.7 percent gain in the last 12 months in the stocks they follow. By comparison, brokerage firm analysts produced an 11 percent loss.
But investors will need to be mindful of new disciplines for stock recommendations.
A virtual quota system could appear, demanding a greater representation of "sell" ratings. Such an outcome could be as useless as a bias toward "buy."
New stock rating systems could result in more volatility in the ratings, even if they aren't as fleeting as the Merrill Lynch call on Merck. One way to boost the number of "sell" signals is to dilute the significance of the recommendation and issue more "sells" and "buys" at an increased pace.
More volatile ratings might be useful for day-traders but harmful for long-term investors. Empowering analysts to generate sales commissions for brokers is hardly a reform.
Wednesday's action: Stocks closed little changed in moderate trading, as a recent rally in the computer technology sector ran out of steam and investors awaited key data on job growth, due Friday.
The Dow Jones industrial average slipped 5.08 points, to 8737.85.
International Business Machines led the Dow decliners in the regular session, closing down $1.52, to $83.69. But IBM shares climbed in late trading.
IBM said late Wednesday it would fill an estimated $3 billion gap between its pension assets and liabilities.
The Standard & Poor's 500 index closed down 3.18, to 917.57. The Nasdaq composite index lost 18.61, or 1.3 percent, to 1430.35. The Russell 2000 index of small-company stocks dropped 3.30, to 397.53.
Morgan Stanley trimmed its investment recommendations for computer technology stocks. Hewlett-Packard predicted weak holiday sales.
Walt Disney continued to decline after reporting thin attendance at its animated film "Treasure Planet."
New York Stock Exchange volume reached 1.53 billion shares. Losing stocks held a narrow edge over winners.
Nasdaq volume totaled 1.88 billion shares. Losers topped winners by a 3-to-2 ratio.
Treasury securities closed higher, reflecting the weak stock
market and profit-taking in corporate bonds.