DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.

Bank of America’s closely watched Sell Side Indicator is just short of flashing a sell signal, placing one of Wall Street’s best known contrarian gauges near the red zone as major stock indexes continue hovering near record levels.

The indicator measures sentiment among Wall Street strategists. Extreme bearishness suggests stocks may be poised for gains, while extreme bullishness points toward a sell signal and weaker returns.

Bank of America told clients that the indicator climbed from 56.4% to 57.2% in September. That left it only 0.3 percentage points below the threshold for an official sell signal.

The latest increase pushed the Sell Side Indicator to its highest level since March 2022, according to the bank’s equity and quant team. The reading reflects increasingly bullish sentiment among Wall Street forecasters.

That enthusiasm carries a warning because the gauge is designed to work against prevailing sentiment. When optimism becomes unusually strong, the indicator suggests future stock market returns could be less impressive.

Past sell signals have preceded below average performance for the S&P 500. During previous instances when the indicator entered sell territory, the benchmark gained an average of 3% over the following 12 months.

That result was still positive, but it badly trailed the S&P 500’s historical average gain of about 10%. The difference illustrates why Bank of America treats extremely bullish strategist sentiment as a cautionary signal.

The risk has not been limited to weaker gains. When the Sell Side Indicator has reached its current level or moved higher, the S&P 500 has posted negative returns over the next 12 months 36% of the time.

Bank of America based that conclusion on an analysis of stock market data stretching back to 1985. The long record gives the indicator a substantial history across periods of both advancing and declining markets.

“The SSI has been a reliable contrarian indicator,” the bank wrote. Its usefulness, according to Bank of America, comes from its relationship with subsequent S&P 500 total returns rather than its ability to identify every market turn.

“While the SSI does not catch every rally or decline in the stock market, the indicator has historically had better predictive capability for subsequent 12-month S&P 500 total returns than many other market timing tools.”

The warning arrives as more Wall Street forecasters turn cautious about stocks, particularly while bond yields continue rising. Higher yields are regarded as a negative for risk assets, and the latest surge has been driven by a mix of economic and fiscal concerns.

Both the 10 year and 30 year Treasury yields touched a 24 year peak during the week. The move has added pressure to a market that remains close to record territory at the index level.

Beneath those headline indexes, however, the damage has been spreading among stocks outside the technology and artificial intelligence trade. Market breadth recently reached a record low relative to the overall level of the S&P 500, according to an analysis from Ned Davis Research.

Market breadth measures the percentage of stocks posting gains across the market. Its weakness indicates that record level indexes have not been matched by similarly strong performance across a broad range of companies.

Rosenberg Research found another sign of weakness beneath the surface. Its analysis showed that the median stock in the S&P 500 was down 15% from its 52 week high.

The Sell Side Indicator has not officially crossed into sell territory, but the remaining distance is narrow. With the reading only 0.3 percentage points from the threshold, Bank of America’s contrarian gauge is approaching a level historically associated with weaker returns and a meaningful chance of losses.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.