BofA’s Sell Side Indicator Nears ‘Sell’ Signal

Bank of America Global Research’s Sell Side Indicator is approaching a 10-year high and is shy of a sell signal. The SSI is the average recommended equity allocation by sell-side strategists. Between February and January this year, the average gained by about one percentage point from 58.4% to 59.2%. In addition, the gain is also the second month in a row where the average rose by a percentage point. 

RELATED: The Warren Buffett Indicator Is Ringing the Alarm to Sell

Sell Side Indicator Nearing the Sell Signal

According to BofA equity and quant strategist Savita Subramanian, the average is nearing a sell signal. In fact, the last time the indicator reached this level was June 2007. This period marked an average of 12-month returns of 13%.

“The indicator still remains in ‘Neutral’ territory where it has been since December 2016. Although returns are less predictable when the indicator is ‘Neutral’ compared to extreme ‘Buy’ or ‘Sell’ levels, when the indicator is at or below current levels, subsequent 12-month returns have historically been positive 89% of the time,” Subramanian said. “While encouraging, the current level is forecasting 12-month returns of just 7%, a much weaker outlook compared to an average 12-month forecast of 16% since the end of the global financial crisis. However, past performance is not an indication of future results,” she added. 

Markets Still Surging 

Despite the tough February experienced by the market amid another coronavirus surge. The US major indices all gained over 10% for March. Consequently, this in part triggered the contrarian BofA sell side indicator. It reached the cautionary level given the volatile global recovery amid the Wall Street bull market. 

Now, Subramanian and Bank of America are waving warning flags on a weakening market. In turn, rising yields can influence the There Is No Alternative (TINA) argument and valuation. “History suggests that 1.75% on the 10-year (the housing forecast and ~25 basis points above current levels) is the tipping point at which asset allocators begin to shift back to bonds,” Subramanian explained.

Sell Side Indicator Agrees With Buffett Indicator

The developments suggest that BofA's Sell Side Indicator is on the correct side that stocks remain overvalued. Also, this means that the bull rally is overdue for an extended breather. Another indicator, which is famed investor Warren Buffett's favorite, is also flashing warning signs. The Buffet Indicator takes the Wilshire 5000 Index which represents the total stock market and divides it by the annual U.S. GDP. Right now, the Buffet Indicator is at 187.5%, up 12.5% from the previous reading of 175%. As a result, the indicator says stocks read as “significantly overvalued,” according to GuruFocus.

Meanwhile, the Sell Side Indicator, based on the average recommended equity allocation of nine Wall Street strategists, rose to 59.4% for March from February’s 59.2%. It's less than a point away from activating the ‘sell’ signal.

SSS Is A Contrarian Indicator

The SSI is an example of a contrarian indicator. This means that when Wall Street is bullish, the SSI sees it as bearish. Even as the current indicator is at ‘Neutral,’ signs are pointing to lower returns ahead. “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 BofA strategists.

The Indicator is now forecasting returns of just 6% for the S&P 500 over the next 12 months. This is much lower than the 14% returns in the same period as seen by most analysts. In fairness, the BofA analysts cautioned that past performance doesn't indicate future results.

Recommendations

Bank of America recommends that investors begin shifting focus on value stocks, including cyclicals. Also, invest in companies that can benefit from the planned infrastructure program of the Biden administration. “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. Quality, which is cheap and neglected, is also a good hedge against volatility,” the bank advised.

Watch the CNBC video report where Bank of America’s Savita Subramanian discusses what key market indicators are telling investors:

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Do you agree with the Sell Side Indicator in cautioning that a Sell period is nearing? What do you think will happen to the market in the next few months? Let us know what you think by sharing your thoughts in the comment section below.