We’ve been working overtime at tastytrade headquarters to try and provide you with the most compelling programming possible through the recent roller coaster in global equity markets.

A recent episode of Market Measures was especially enticing and it's for this reason we are providing you with a tasty review of the show's sizzling revelations.

Like a calm surface over rushing waters, the title of this particular segment on Market Measures "Stock Pickers | Analyst Performance," appears a lot tamer than it is.

This is without question worth a few minutes of your time if you haven’t seen it already.

Tom Sosnoff and Tony Battista kick off the show by describing how the analyst function works within financial institutions. They describe how a primary function of analysts is to provide ratings that detail a firm's expectations for a security over a period of time.

Each firm utilizes their own set of terms to ultimately rate their position on a particular security. For example, if a financial firm is negative on a security, they may give it a rating of "underweight, sell, or underperform." On the flip side, analysts use the terms "overweight, buy, or outperform" for securities they expect to rise in price going forward.

The Market Measures team embarked on a magical, mystery tour to discover just how accurate these ratings tend to be over time.

To do this, tastytrade looked at data from 1998 to the present that included a total of 10,250 ratings from a variety of firms. Obviously, not all ratings are made public, so this is a slice of the available data over that timeframe.

The researchers at tastytrade then looked to answer two different questions:

Under what conditions did analysts place their recommendations?

How accurate were the recommendations?

What the research first indicated was that the majority (65%) of "downgrades" on securities actually arrived a week after a stock's price actually trended up! This finding is illustrated below:


While the above information is certainly interesting, the next set of results are the cherry on top and worth significant consideration.

It's clear from the below data that analysts have provided little to no edge in forecasting the direction of stock prices. In fact, they appear to match the 50/50 success rate that most probability theories would indicate regarding successful directional stock picking.

The findings are illustrated below, and show roughly a 50% success rate across the board for analysts in forecasting equity directions:


One thing to note is the data above does seem to indicate analysts have more success in picking upward direction for stocks as opposed to down - though that might be related to the natural upward drift of stocks over time.

The ramifications of this study are far-reaching and worthy of further consideration. Be on high alert for further coverage of this topic and other directional subject material in the near future on the tastytrade network.

The full episode covering analyst predictions is accessible through this link.

We hope you will follow up with any and all questions on this topic or any other trading-related questions you might have!

Thanks for being a part of the tastytrade community!