Stock market sentiment ‘increasingly euphoric’ on cusp of sending ‘sell’ signal

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The best on Wall Street are so bullish on stocks that a counter sentiment indicator is about to send a sell signal. BofA analysts led by Savita Subramanian said in a note Thursday that the bank’s Sell Side Indicator, which tracks the average recommended share allocation by Wall Street sales-side strategists, rose for the third consecutive month in March to 59.4%, compared to 59.2% in February.

That puts the indicator at a 10-year high and less than one point from a contrary “sell” signal, the closest since May 2007, when the S&P 500 SPX Index, + 0.98% fell 7% over the years. next 12 months. (see chart below).

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BofA Global Research

Investors and analysts pay close attention to a variety of sentiment measures. Extreme bullish or bearish readings are often seen as opposite signals that markets should bounce or pull back. The S&P 500 on Thursday passed the 4,000 milestone for the first time, while the Dow Jones Industrial Average DJIA, + 0.48% traded not far from its all-time high. US stocks rallied in the first quarter, with cycle-sensitive stocks leading the way as aggressive fiscal stimulus measures and rapid vaccine launches stoked expectations of a post-COVID economic boom. “Increasingly euphoric sentiment is a key reason for our neutral outlook, as the cyclical rebound, vaccine, stimulus, etc. are heavily traded on the market,” the analysts wrote. Stocks have rebounded sharply after plunging into a bear market that bottomed out last March as the pandemic began to take hold. Analysts noted that since last March, the average recommended share allocation has increased by more than three times the typical rate. It has risen 450 basis points, or 4.5 percentage points, in the last 12 months from the 138 basis point average after previous bear markets. “We have found Wall Street optimism to be a reliable counter indicator,” they wrote. For now, the indicator remains in “neutral” territory. What does that mean for returns? Analysts noted that when the indicator has been at or below its current level, subsequent 12-month returns have been positive 89% of the time. While that’s encouraging, they noted that the current indicator reading is in line with 12-month returns of just 6%, well below the 12-month average forecast of 14% since the end of the 2008 global financial crisis. , adding the standard note that past performance is not an indication of future results. Analysts said investors would benefit best if they focused on areas sensitive to the real economy, including value and cyclical stocks, capital expenditure recipients and small-cap companies as President Joe Biden tries to push his plan forward. of infrastructure spending of 2 trillion dollars. But not everything is blue sky. It appears that the market is already pricing in additional stimulus and the focus is shifting to returning it (ie higher taxes), ”they warned. “Today’s valuations are indicating long-term anemic returns and rising rates are also a hindrance for income investors, who have accumulated in equities amid low rates and corporate margins.” They also see room for volatility to pick up in the second half of the year. That said, “staying invested is an underrated way to avoid losses,” they wrote, with a focus on the fundamentals about momentum and positioning factors that win in the long run. A focus on quality stocks, which are “cheap and sloppy” can also provide a hedge against volatility, they said.