Stock market euphoria is within striking distance of flashing a sell signal, Bank of America warns

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Traders work on the floor of the New York Stock Exchange (NYSE) on March 16, 2020 in New York City

  • A BofA contrarian indicator that measures investor bullishness rose for the third straight month to a 10-year high in March.
  • The signal is less than a point away from indicating overextended optimism on Wall Street.
  • BofA’s indicator forecasts a lackluster 6% total return in the S&P 500 over the next 12 months.
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A contrarian indicator from Bank of America that measures investor bullishness rose for the third straight month in March and now sits at a 10-year high.

BofA’s Sell Side Indicator, which is based on the average recommended equity allocation of nine Wall Street strategists, rose to 59.4% from 59.2% last month. It’s less than a point away from flashing a “sell” signal.

The SSI is a contrarian indicator, meaning that when Wall Street is bullish, that’s a bearish sign for stocks, according to a team of equity strategists led by Savita Subramanian. The indicator is now closer to a “sell” signal than it has been since the onset of the Great Financial Crisis. While it’s still at neutral levels, it’s indicating tepid returns up ahead, BofA said.

“Increasingly euphoric sentiment is a key reason for our neutral outlook as the cyclical rebound, vaccine, stimulus, etc. is largely priced into the market,” said the strategists.

The current of the indicator is forecasting returns of just 6% for the S&P 500 over the next 12 months, much weaker than the average 12-month forecast of 14% since the end of the Financial Crisis. However, the strategists noted that past performance is not an indicator of future results.

Bank of America recommends investors focus on stocks that are sensitive to the real economy including cyclicals, value stocks, and companies that will benefit from an explosion of capital expenditures from Biden’s infrastructure plan.

“Our work suggests staying invested is an underappreciated way to avoid losses, and that focusing on fundamental factors over momentum/positioning factors wins over the long-term,” added the strategists. “Quality, which is cheap and neglected, is also a good hedge against volatility.”

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