By Barbara Kollmeyer
As the holidays and Santa Rally season approach, one Wall Street bank is telling investors to curb their enthusiasm when it comes to stocks.
A contrarian "buy" signal for stocks has already expired, weeks after it was triggered, a Bank of America team led by strategist Michael Hartnett said Friday.
On October 20, strategists noted that their Bull & Bear indicator was in "extremely bearish" territory at 1.9 from a previous 2.2. A contrarian buy signal for riskier assets is triggered when the bank's so-called Bull & Bear indicator falls below 2.0.
But on Friday they reported that the indicator had risen to 2.1 from 1.7, taking it into "neutral" territory, as this chart shows:
The indicator has risen as some investors have fallen in love with the stock lately. In its latest Flow Show report, which is published every Friday, the bank reported the largest two-week inflow into equities ($40 billion) since February 2022.
Hartnett has warned that investors have had a collective one-sided mentality when it comes to the view that the Federal Reserve is done with interest rate hikes, and there are almost no contrary opinions. In Bank of America's November survey, 80% of fund managers said they expected lower interest rates, 82% called for lower inflation and 61% called for lower bond yields.
Read: Stock market investors are convinced the Federal Reserve is done with rate hikes. Why it's not a done deal.
The analyst and his team have warned that the 10-year Treasury yield could make next year difficult, with a "risk" to markets of 4% to 5%, but a drop to 3% to 4% would likely cause conversations about recession. , a more bearish risk.
In the last week ending November 21, $40 billion flowed into cash instruments, $16.5 billion into stocks, $4 billion into bonds, and $700 million into gold.
And cash has clearly been the winner this year: Bank of America reported that $1.2 trillion has been invested in those short-term instruments, short-term instruments like three-month bills BX:TMUBMUSD03M. Some $186 billion has gone into Treasury bonds and $143 billion into stocks.
Read: This banking giant has been saying cash is king. Now he advises switching to stocks.
With just a few days left until the end of November, the S&P 500 SPX has gained 8.6%, which, if the level holds, would mark the index's best monthly performance since July 2022, according to FactSet.
The index got a big boost last week when a subdued inflation reading sparked a buying frenzy and the best day for the S&P 500 and Nasdaq since April. The inflation data fueled hopes that the groundwork has been laid for a rally in stocks later in the year.
While Hartnett and her colleagues have expressed caution, the bank's head of quantitative and equity strategy, Savita Subramanian, said she expects the S&P 500 index to finish next year at 5,000, a 10% gain from here.
Part of the reason is "too many skunks at the party," he says, referring to "stock bears with no convictions," aside from AI enthusiasts and fund managers and others with lots of cash. His 2023 forecast of 4,600 for the S&P 500 seems much more accurate, unlike most of his overly cautious Wall Street rivals.
Read: RBC and BofA predict the S&P 500 will head to 5,000 in 2024, but here are 10 reasons why investors should tread carefully
-Barbara Kollmeyer
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11-24-23 1626ET
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