Highly successful indicator predicts 18% rally

Published Thu, Oct 1 201510:55 AM EDTUpdated Thu, Oct 1 20152:46 PM EDT

After stocks go through a correction, pundits dust off old Wall Street market indicators to try to game a bottom. Things like "Dow Theory" and "death cross." Well here's one more for you. Bank of America Merrill Lynch's "Sell Side Indicator" predicts the S & P 500 will rally 18 percent over the next 12 months, according a report sent to clients Thursday. What's more, the signal had a 96 percent success rate over the last 30 years. Equity and quant strategist Savita Subramanian wrote: "In September, the Sell Side Indicator — our measure of Wall Street's bullishness on stocks — dropped back to 53.1 from 54.0 the prior month, moving the indicator back into 'Buy' territory after briefly breaching 'Neutral' territory last month. While this indicator has improved significantly off of the 2012 lows, today's sentiment levels are still near where they were at the market lows of March 2009 and over 12 points from the level of extreme bullishness that would indicate a contrarian 'Sell' signal in our model." It's a surprisingly simple contrarian model. When Wall Street strategists give up on stocks and recommend clients put less and less money toward equities, the market is close to rallying. "Strategists are still recommending that investors significantly underweight equities, at 53 percent vs. a traditional long-term average benchmark weighting of 60-65 percent." When bullishness got this low in the past, the S & P 500 posted a positive return 12 months out on 96 percent of the occasions. And right now, the metric calls for a 16 percent price return in 12 months. Add in the 2 percent dividend yield of the benchmark and that gets you to 18 percent. Read More Sunken sentiment: Investors fear 1987-like fall This is just one of the many inputs into Bank of America Merrill Lynch's official S & P 500 forecast, which is pretty bullish as well, calling for about a 10 percent gain through year's end. To be sure, a rally of this magnitude in a quarter does not happen that often. Going by the average S & P 500 2015 target of 2,200 on Wall Street, the market would need to rally 14.5 percent in three months. Over the last 20 years, the S & P posted gains above that percentage during only five quarters. — With reporting by Christopher Hayes

Traders work on the floor of the New York Stock Exchange.

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After stocks go through a correction, pundits dust off old Wall Street market indicators to try to game a bottom. Things like "Dow Theory" and "death cross."

Well here's one more for you.

Bank of America Merrill Lynch's "Sell Side Indicator" predicts the will rally 18 percent over the next 12 months, according a report sent to clients Thursday.