The Tell: The stock market is ‘inching toward euphoria’, warn analysts at BofA


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.”

BofA’s note comes also as Stifel’s head of institutional equity strategy, Barry Bannister also recommends a cautious approach to investing, while also predicting that the S&P 500 is headed for a performance that could see it flat to down 5% to 10% for the next few months.

Meanwhile, stocks were storming higher, with the Dow Jones Industrial Average
the S&P 500 index

and the Nasdaq Composite Index

all kicking off trade in May on a much higher note.

So much for sell in May and go away?

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