Reliable Bank of America model sees 90%-plus chance the market will be higher one year from now

Published Mon, Jun 1 20208:34 AM EDTUpdated Mon, Jun 1 202010:50 AM EDT

(This story is for CNBC Pro subscribers only.) The deterioration in investor sentiment amid the coronavirus pandemic is triggering a contrarian buy signal in a model with a near-perfect success rate, according to Bank of America. The Wall Street firm's "Sell Side Indicator" ticked down to 54.9 in May from 55.2 in April, demonstrating strategists are getting more bearish on the market. The gauge is contrarian in nature, meaning that extremes in sentiment suggest that the market will likely go in the opposite direction. The level measures strategists' bullishness on stocks, based on their average recommended equity allocation. Bank of America said historically, it's bullish for stocks when Wall Street is extremely bearish. "Historically, when the Sell Side Indicator has been this low or lower, total returns over the subsequent 12 months have been positive 94% of the time, with median 12 month returns of +20%," Bank of America equity and quant strategist Savita Subramanian said in a note to clients Monday. U.S. equities pulled off back-to-back months of positive returns in April and May as investors hoped that the economy reopening and a flattening of the coronavirus curve would create better economic stability. The Dow Jones Industrial Average and S & P 500 are up nearly 40% from their 52-week lows and the technology-heavy Nasdaq has gained more than 43% since late March. The magnitude of the comeback has surprised many investors. Despite the rally, Bank of America's indicator showed sell-side analysts shrunk their allocation for stocks. Market participants are weighing "an ultra-accommodative Fed and an equity market increasingly dominated by Tech and high quality companies against the worst economic environment in the post-war era," said Subramanian. The small dip in sentiment in May is a contrarian bullish signal for stocks, the firm said and could leave U.S. stocks up 20% a year from now. The Sell Side Indicator is one of the five inputs into Bank of America's official market forecast, which puts the S & P 500 at 3,419 over the next 12 months, a 12% rally from its current levels. But the firm believes most of those gains will be in 2021. Bank of America's S & P 500 target price for the end of 2020 is 2,600, implying a 14% drop from current levels. — With reporting from CNBC's Michael Bloom.

Charging Bull Statue is seen lonely at the Financial District in New York City, United States on March 29, 2020.

Tayfun Coskun | Anadolu Agency | Getty Images

(This story is for CNBC Pro subscribers only.)

The deterioration in investor sentiment amid the coronavirus pandemic is triggering a contrarian buy signal in a model with a near-perfect success rate, according to Bank of America.