This reliable contrarian indicator says investors shouldn't hit the sell button on US stocks just yet

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US bond yields are on the charge, hitting multi-year highs on Thursday.

And after a stonking run to start the year, US stocks are starting to take notice, wavering in recent sessions after rising to record highs late last week.

It’s got many asking whether a pullback is on the cards, or perhaps something even more substantial?

Well, if this reliable indicator is anything to go by, should stocks weaken in the period ahead, it should be seen as a buying opportunity for investors:

Source: BAML

It’s Bank of America Merrill Lynch’s (BAML) Sell Side Indicator, a measure that takes the average recommended equity allocation of Wall Street strategists to determine their bullishness towards stocks.

BAML says that it has been a reliable contrarian indicator in the past, providing a bullish signal when Wall Street was extremely bearish and a bearish signal when Wall street was overly bullish.

Right now, during this period when stocks are starting to look toppy, BAML says it remains far below the levels that have heralded the start of a prolonged pullback in the past.

“The rapid improvement in equity sentiment over the last 17 months has continued to push the indicator further into ‘neutral’ territory,” it says. “While we are still a long way off from the current ‘sell’ threshold of 62.7, at the current pace, we could reach those levels by January 2019.”

So while we’re approaching levels that have historically heralded the start of weakness in stocks, BAML says the indicator is still pointing to strong gains arriving in the year ahead.

“With the S&P 500’s indicated dividend yield currently below 2%, this implies a 12-month price return of 10% and a 12-month value of 3,098 ponits,” it says.

“Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 93% of the time, with median 12-month returns of 19%.”

So history is on the side of dip-buying any weakness right now, at least according to this indicator.

BAML’s official year-end target for the S&P 500 is 3,000 points, some 6.3% higher than is current level of 2,822 points.

As for the signal being generated by the Sell Side Indicator, BAML wisely points out that “past performance is not an indication of future results”.

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