The stock market is inching toward euphoria, warn analysts at BofA – MarketWatch
Fear that the equity-markets are getting a bit too ebullient is starting to emerge in a number of research reports as stocks trade near record levels.
The crew at BofA Global Research advocated for caution in a Monday report titled, “Inching toward euphoria,” amid a rebound from the COVID pandemic that has sent one indicator to a 13-year peak as bullishness grips the U.S. market.
“The Sell Side Indicator, which tracks the average recommended equity allocation by sell-side strategists, rose for the fourth consecutive month to 59.8% from 59.4%, a 13-year high,” wrote the analysts.
BofA researchers led by star analyst Savita Subramanian say that the firm’s sell-indicator, which they describe as a reliable contrarian indicator, is flashing a warning sign if not a sell signal.
“Increasingly euphoric sentiment is a driver of our more cautious outlook as we believe that vaccine deployment, economic reopening, stimulus, etc. are largely priced in,” the analysts wrote.
The researchers note that there hasn’t been a 5% retreat in the broader market in the past six months even though such pullbacks tend to happen at least three times on average during a calendar year. The strategists also note that the market hasn’t seen a 10% retreat in stocks in the past 14 months. Pullbacks of that magnitude tend to occur at least once a year.
All that said, BofA’s team noted the indicators aren’t quite triggering a “sell” signal yet, even though the group’s sell-side indicator hasn’t been this high since May of 2007, which followed a 7% tumble in stocks back then.
Subramanian and team, however, believe that this time around “tepid” rather than negative returns are likely ahead.
“While encouraging, the current level is forecasting 12-[month] returns of just 6%, a much weaker outlook compared with an average 12m forecast of 14% since the end of the Global Financial Crisis,” the analysts note, adding this bit of a disclaimer: “However, past performance is not an indication of future results.”