BofA just updated one of their favourite market indicators, and it’s looking very bullish for stocks.
Savita Subramanian, who heads the bank’s quant and equity strategy, says the indicator is flashing the biggest contrarian buy signal they’ve seen in 27 years of data:
After triggering a Buy signal in May, our measure of Wall Street bullishness on stocks has continued to decline, marking the tenth time in the past year that the indicator has fallen. This month’s 5.5ppt decline pushed the indicator down to 43.9, the lowest level in the history of our data going back to 1985, suggesting that sell side strategists are now more bearish on equities than they were at any point in the last 27 years. Given the contrarian nature of this indicator, we are encouraged by Wall Street’s lack of optimism and the fact that strategists are recommending that investors significantly underweight equities vs. a traditional long-term average benchmark weighting of 60-65%.
Here’s a look at the indicator, which according to Subramanian is “based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month,” has plunged in 2012:
Photo: BofA Merrill Lynch
Subramanian writes that although it’s not their official target for the S&P 500, the indicator implies a 12-month price target of 1808 on the index.