Wall Street is awash in pithy sayings and adages, like “sell in May and go away.” They’re the financial equivalent of old wives’ tales. However, many of them hold a grain of truth and are based on decades of hard-won experience. Bob Farrell, Merrill Lynch’s legendary market strategist, compiled a list of 10 such common sense “Rules to Remember” years ago, and they’re still considered some of the best market yardsticks around.
Farrell’s Rule #7 holds that markets are strongest when their uptrend is broadly supported, and weakest when they narrow to a handful of stocks. In other words, markets that keep going up on the strength of a decreasing number of blue-chip names are in trouble. Taken a step further, major blue chip stocks owned by everyone under the sun that suddenly diverge from a rising market are probably telling you something.
At the moment, Google ($GOOG) is telling us something.
A quick look at the chart shows that the tech giant, a member of both the S&P 500 and the NASDAQ 100, has conspicuously avoided the fall rally. In fact, GOOG has essentially been flat all year, retraced only half of the October selloff, and is down nearly 6% year-to-date vs. more than 14% for the S&P. If this were your run-of-the-mill tech stock, we’d chalk it up to a company-specific issue and move on. But Google is an institutional darling, owned by countless mutual funds, pension plans and money managers, and easily one of the most widely-held and followed securities in the world. From a markets perspective, it is important.
$GOOG’s popularity is also evident on Vetr.com. It is resident in 119 watch lists and recipient of 11 ratings (all buys), giving it an extremely strong 4 ½ stars. According to Reuters, 38 of 48 institutional analysts covering Google have ranked the stock a buy, with only 10 holds and zero sells. For what it’s worth, the average Vetr.com 12-month price target, at $635 , is a little less bullish than the average Wall Street target of $889.
Such an alignment of opinion between Vetr.com users and Wall Street analysts is unusual. Since they’re completely free of any investment-banking or similar bias, our ratings tend to be much more balanced. In this case, though, both Vetr.com and Wall Street seem to universally believe Google is going to go up, while the stock’s action during a record-setting rally suggests exactly the opposite.
It is worth noting that one of Bob Farrell’s Rule #9 says that when all the experts agree, something else is going to happen. So far #9’s been right. What do you think? Should investors believe the raters, or believe the market?