Why was the name "Holy Roman Empire" a misleading name?

The Holy Roman Empire was made up of a group of little
states in Germany and Italy.  As your question implies, its name was a total
misnomer.

The Empire was not holy because it was not based
in any way on moral acts.  Instead, the Empire started because Charlemagne wanted the
Church's support so that he would have more power.  Meanwhile, the Church wanted the
support of a major ruler so it would be protected.  The creation of the Empire was about
power, not holiness.

The Empire was not Roman.  It didn't
cover nearly what the Roman Empire had covered and it was not ruled by people with any
connection to Rome.  It also wasn't really an empire because the Emperor's did not have
much control over the various little states that were supposedly parts of their
empire.