Investment bank indicator closer to triggering buy signal
Wall Street may be skeptical of the recent equity rally, but investors can take some comfort in the fact that bearish sentiment is often a contrarian indicator.
Bank of America Merrill Lynch’s sell-side indicator moved lower in January, reaching its lowest level since August 2009, which happened to be just months after the recession ended.
The investment bank’s measure of Wall Street bullishness on stocks has declined in five of the past six months, recently dipping to 55.6.
Savita Subramanian, equity and quantitative strategist at BOFAML, noted that the indicator is within striking distance of triggering a buy signal. She told clients that a dip below the current buy threshold of 55.4 would represent a major decline in Wall Street’s bullishness on stocks relative to the past 15 years.
The fact that strategists are increasingly recommending investors underweight equities when compared to a traditional long- term average benchmark weighting of 60 per cent to 65 per cent also support this contrarian thesis.
BOFAML’S sell-side indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month.
The S&P 500 extended January’s solid advance on Wednesday. As a result, the index has now effectively recovered all of the losses racked up during the summer 2011 sovereign debt/credit rating drama, according to Robert Kavcic, economist at BMO Capital Markets.
“In the process, the 50-day moving average has crossed above the 200-day average, a bullish sign for chart aficionados,” he said. “You’d hardly know from the lack of fanfare that the index has surged more than 20 per cent since early October.”