The frantic dash into stocks has hit a boiling point, causing a reliable indicator from Bank of America Merrill Lynch to flash a sell signal Friday.
High levels of investor enthusiasm can be a bad thing when it comes to financial markets, as too much money can push valuations out of whack. BofAML's historically reliable indicator is pointing to just such a period.
The firm's strategists say overheated bullishness tripped its "sell" indicator Tuesday, in the early stages of what has been a rough week. When all is said and done, technical indicators point to a level of 2,686 on the S&P 500, which would represent a nearly 5 percent drop from Thursday's closing level, BofAML said in a note to clients.
This is the 12th time that the "Bull & Bear" indicator has indicated a "sell" position dating to 2002, and each time has been accurate, the firm said in a note last week. The average peak-to-trough return is a drop of 12 percent.
That's the bad news.
The firm, however, retains a constructive view on the market, with technical strategists telling clients earlier in the week that the fast start in January bodes well for the rest of the year. Based on the 5.6 percent gain for the first month of the year, history suggests the S&P 500 is likely on its way to 3,000 by the end of 2018 and even could hit 3,100, respective gains of 6.3 percent and 9.9 percent.