Should I stay or should I go? That's what some investors are asking themselves.
The average 401(k), IRA or pension-fund investor is faced with the following dilemma: Take a 30% to 40% loss in market value and get out now, or stay invested and hope things will get better. How would anyone -- both the professional and average investor -- know?
One way is to find out if you should buy, hold or sell individual stocks. TheStreet.com Ratings employs an equity model that rates more than 5,000 stocks daily, apportions a rating of A through E, and a recommendation -- buy, hold, sell -- to each. The model takes the emotion out of the decision.
The results of our model show that the percentage of buy recommendations has steadily fallen throughout the year and dropped off a cliff in October. From Oct. 1, the share of buys has plummeted by almost half, to 14% from 26%. Holds and sells have risen. However, hold recommendations have increased the most, to 45% from 36%. That finding would favor a strategy of riding out the market. Buying the market, in general, is not recommended by our model.
If you look at the percentages from January to the end of October, sell recommendations increased by the same amount as holds, by 8%. It's just that the sell recommendations have increased more gradually up to this point. The underlying drumbeat is still there and might be about to pick up speed.
With consumer spending falling, GDP contracting and a slew of economic concerns both domestically and globally still to be resolved, we may see sell recommendations increase in the near future.
The market is on pause after a substantial rally. Our model says it's not going up, and gravity suggests that it can't stand still. So you will have to draw your own conclusions:
TheStreet.com's stock model is "fundamental." That is, it is anchored to the fundamentals of a company according to its financial statements. However, it also has a unique feature that essentially incorporates the "wisdom of the crowd" theory as expressed by the movement and volatility of the stock price. So if a share price is steadily rising, the model views that as positive. If it is climbing but with erratic movements up and down -- increased volatility, in other words -- the model will view this in a less favorable light. Hence, the "crowd" is not certain of the company's prospects.
Volatility is a huge issue right now. It has reached unprecedented levels and, as such, our model has detected this uncertainty or lack of conviction. With a deterioration of company fundamentals and increased market uncertainty, the TSC stock model has correctly accounted for both factors and assigned more companies with hold and sell recommendations.
One other unique feature of the model is that it effectively accounts for dividends twice in generating ratings. This is critical, given the current economy and something investors, including
, have spoken about recently. Stocks paying dividends are sought after as the U.S. economy slows and investors, battered by losses, seek safer, dividend-paying stocks. Our model accounts for dividends both in the calculation of total return (capital gains/losses in share price movements and dividends earned) and also in the fundamental assessment of a company via the incorporation of dividend yield.
For more information about our model, click
Sam Patel, CFA, is the manager of mutual fund research for the TheStreet.com Ratings.
In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
While Patel cannot provide investment advice or recommendations, he appreciates your feedback;
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