A contrarian stock market indicator is on the verge of flashing a 'buy' signal, Bank of America says
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- Stocks are edging closer to a "buy" signal, according to BofA's contrarian market indicator.
- The bank's Sell Side Indicator is just three percentage points away from flashing a bullish reading.
- The backdrop for economic growth also looks strong, the bank's economists said in a note.
A contrarian indicator in the stock market is edging closer to a "buy" signal, according to Bank of America.
The bank's Sell Side Indicator, a contrarian stock market gauge that flashes a bullish signal when investor sentiment is bearish, and vice versa, is now closer to a "buy" signal than a "sell" signal, strategists said in a note on Wednesday.
The SSI is still in neutral territory, but the gauge slipped in April, thanks to the S&P 500's steep sell-off over the past month.
The lower reading is a bullish sign for stocks, as the indicator is now just 3.3 percentage points away from flashing a "buy" reading, strategists said.
"The SSI has been a reliable contrarian indicator - in other words, it has been bullish when Wall Street was extremely bearish, and vice versa," the bank wrote. "The reversal in sentiment this month suggests that we are even farther from euphoria."
When stock market sentiment was this low or lower, stocks have gained over the next 12 months 94% of the time, the strategists noted.
Stagflation fears have picked up as inflation continues to run higher than expected, while first-quarter GDP came in below estimates. But Bank of America economists are still seeing a "healthy growth backdrop" for the economy. Consumer spending has held up this year, and corporate earnings look on track to post at least 7% growth for the first quarter, according to data from FactSet.
"We are constructive on equities and stick with our year-end forecast of 5400 for the S&P 500," strategists added, implying 7% upside for stocks through the end of the year.
Sentiment in the market has soured as traders fret over high interest rates, rising geopolitical risks, and the threat of stagflation. Investors are looking ahead to the Fed's next rate decision, with central bankers expected to issue guidance on the path of monetary policy Wednesday afternoon.