Sentiment on Wall Street has gotten so bad that strategists have finally started to throw in the towel, which could trigger a reliable buy signal from Bank of America. The Bank of America Merrill Lynch Sell Side indicator, based on a survey of Wall Street strategists’ asset allocation recommendations, hit its lowest level since early 2017. The bank said historically, when the indicator was at or below current levels, the 12-month returns for the S&P 500 were positive 94% of the time, and the median 12-month return was 22% higher. “Equity sentiment resumes its descent toward a ‘buy’ signal,” Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Securities, said in a note. “We’ve found that the Wall Street stock consensus allocation has always been a reliable contrarian indicator.” The indicator simply measures the positioning of the largest portfolio managers. Bank of America said a range of 60% to 65% represents the traditional “normal” equity allocation for a balanced fund. The 2008 financial crisis pushed the indicator below this range for the first time since 2000. Currently, this level stands at 52.8% in October after falling 6 percentage points this year. Bank of America said strategists began to recommend an increased allocation to bonds as yields continued to rise. “The growing debate over whether bonds now look more attractive than stocks marks a break from the post-GFC era when TINA (“There is no alternative” to stocks) was the argument dominant,” Subramanian said. The stock market has been on a rollercoaster ride this year as the Federal Reserve rushed to aggressively raise interest rates to keep inflation under control. The central bank is expected to raise rates by 75 basis points on Wednesday for the fourth consecutive time. The S&P 500 is down more than 19% this year. Admittedly, the sell indicator is just one of five metrics that Bank of America considers for its official market forecasts. The bank sees the S&P 500 ending the year at 3,600, about 6% below where it is currently trading.
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