Despite a rough finish to December, investor optimism has only grown, suggesting the sell-off may not actually be over yet. Bank of America said its stock market sentiment reading was flashing signs of over-bullishness. In the past, these indicators have been consistent with near-term selling points, as rising sentiment or optimism could mean a stock was overvalued and overbought. The company’s “sell-side indicator” came close to triggering a sell signal. Wall Street’s measure of typical stock allocations in balanced portfolios has risen for eight straight months to 57%, its highest level since early 2022. “Our indicators remain in ‘neutral’ territory but are just 1 percentage point away from triggering a ‘sell’ signal,” Savita Subramanian, equity and quantitative strategist at the bank, said in a client note Thursday. .SPX 3M mountain S&P 500 Performance Current levels “suggest that the 20%-plus annual returns we’ve seen over the past two years may be a thing of the past,” she added, though she noted that over the next 12 months, during that period , market sentiment remains consistent with a 10% return for the large-cap index. For example, in February 2021, the indicator was just 1 percentage point away from hitting “sell” levels, and the market ended up rising 27% over the next year. However, when SSI triggered a sell signal, the average 12-month return was just 2.7%, a negative return of 38.9%. However, there are other signs that the market is overheating. Bank of America’s monthly fund manager survey for December showed professional investors’ cash levels fell to 3.9%, the lowest level since June 2021. The signal, in the past, coincided with “massive tops in risk assets.” Hartnett said that since 2011, “sell” signals have caused global stock markets to fall by an average of 2.4% in the next month and 0.7% in the next three months. But it’s not a perfect indicator either, as the February 2024 survey showed that stock allocations reached their highest levels since November 2021, which only foreshadowed last year’s sharp rise in stocks. Broader sentiment levels, which take into account allocations to cash and stocks and the outlook for economic growth, hit their highest levels since August 2021 after posting their biggest monthly gain since June 2020.
