Wall Street bullish sentiment hits 3-year low

Published Thu, Sep 1 201611:23 AM EDTUpdated Thu, Sep 1 20161:03 PM EDT

Even though the stock market rallied 6 percent this year, Wall Street pundits remain quite bearish, recommending the lowest exposure to U.S. stocks in three years, according to Bank of American Merrill Lynch 's Sell Side Indicator. The firm's measure, which is based on the average equity allocation by Wall Street strategists, or how bullish they are on equities, fell to 49.6 in August from 50.8 in July. The bearishness, however, could be a buying opportunity for those investors willing to take a contrarian stance, according to Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Merrill Lynch. The simple contrarian model suggests that when Wall Street strategists give up on stocks and recommend clients put less and less money toward equities, the market is close to rallying. "Historically when our indicator has been this low or lower, returns over the next 12 months have been positive every time," she wrote in a research note, predicting a 22 percent rally ahead. Source: Bank of America Merrill Lynch Subramanian explains that the Sell Side Indicator remains "firmly in buy territory" after first triggering a buy signal in April (Since that signal first emerged, the S & P 500 is up 5 percent). At the current levels, strategists recommend clients allocate 49.6 percent to equities compared with a traditional benchmark allocation of 60 to 65 percent, based on BofA's estimates. "The sell side's growing bearishness stands in contrast to signs of increasingly bullish buy side positioning," she wrote, explaining that large institutional players continue to buy into the rally. Right now, the Sell Side Indicator calls for a 20 percent price return on the S & P 500 to 2,640 in the next 12 months. When a 2 percent dividend yield on the benchmark is added, the potential gain jumps to 22 percent, Subramanian noted. To be sure, this is one of the many inputs Bank of America Merrill Lynch includes in its official target year-end target price for the S & P 500, which is not as bullish, standing at 2,000, or 8 percent lower from here. Other strategists remain on a similar camp, with the average price target standing at 2,170, or where the index currently trades. "We have found that Wall Street's consensus equity allocation has been a reliable contrary indicator. In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa," Subramanian said.

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

Getty Images

The firm's measure, which is based on the average equity allocation by Wall Street strategists, or how bullish they are on equities, fell to 49.6 in August from 50.8 in July.

The bearishness, however, could be a buying opportunity for those investors willing to take a contrarian stance, according to Savita Subramanian, head of U.S. equity and quantitative strategy at BofA Merrill Lynch.