The market is showing a buy signal that suggests shares will rise one last time before an ‘epic’ selling opportunity in the second quarter, says Bank of America.

trader on NYSE

A trader works at the New York Stock Exchange NYSE in New York, the United States, on March 9, 2022.Michael Nagle/Xinhua via Getty

  • The stock market showed a contrarian buy signal this week that has led to quick gains in the past.

  • The Bank of America bullish/bearish indicator fell to the 2.0 level for the first time since March 18, 2020.

  • While a stock market rally is likely in the coming weeks, it will represent an “epic” selling opportunity for investors, BofA said.

Investors expecting a continued rally in the stock market after its first quarter decrease of up to 12% you can get exactly that in the coming weeks, according to a note on Friday from Bank of America.

The bank’s widely followed bullish/bearish indicator fell to the 2.0 “buy” level this week, which has historically led to strong three-month returns for the global stock market. The last time the contrarian buy signal flashed was on March 18, 2020, just days before the stock market bottomed out amid the onset of the COVID-19 pandemic.

The idea behind a contrarian buy or sell signal is to go against the wisdom of the crowd and do the opposite of what everyone else is doing before they eventually follow suit. The BofA gauge is showing extreme bearish sentiment based on various domestic market indicators, suggesting that the stock market sell-off is near or near exhaustion and prices could rally as buyers begin to regain momentum.

Some of the metrics tracked by BofA’s bull/bear system include cash levels among investment managers, bond and stock outflows from funds, and stock breadth, or the average share of stocks in the middle of the spread. broader uptrend or downtrend of the market.

The bull/bear indicator has shown eight buy signals since 2013, and since 2002, the signal has generated a three-month average return of 8% for global stocks, according to BofA. And in the months following BofA’s contrarian buy signal, stocks tended to outperform bonds and high yield bonds tended to outperform government bonds, illustrating the potential for a shift to a riskier environment. in the future.

But any subsequent rally in the stock market over the next few weeks should be seen as an “epic selling opportunity”, BofA said. That’s because a continuous shock in rising inflation, higher interest ratesand lower corporate earnings growth means that S&P 500 it is more likely to trade below 4,000 than above 5,000 in 2022, according to the bank.

BofA does not expect those shocks to improve any time soon, noting that recent producer price inflation readings suggest new inflation records are likely in the coming months. Meanwhile, the interest rate shock is about to get worse as the Fed seriously considers raising rates by 50 basis points at its next meeting.

“Asset prices are driven by two things and two things only… rates and earnings,” BofA explained. The bank found previous periods in which earnings growth slowed while inflation and interest rates rose, and it happened with a struggling stock market.

During those time periods, the S&P 500 “struggled a lot,” falling 11%, 30% and 12% in 1969, 1974 and 1977, respectively, according to BofA.

But investors can navigate the fraught macro backdrop throughout the 2020s by lowering their return expectations and owning small-cap, European and strategic interest growth stocks, BofA said.

“Every country has companies of strategic interest and in the name of the ‘national interest’ those companies will find favor with governments determined to protect voters from geopolitical threats,” BofA said.

Read the original article at Business Insider

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