Bank of America says the market is in striking distance of a sell signal

Published Sun, Apr 4 20218:30 AM EDT

As reopening optimism keeps pushing the stock market to all-time highs, it's almost time to sell, according to a Bank of America market gauge with a strong short-term track record. The firm's Sell Side Indicator, which tracks the average recommended equity allocation by sell-side strategists, rose for a third straight month and hit 59.4%, up from the prior month's level of 59.2%. That's a 10-year high for the indicator and the closest level to a contrarian sell signal since May 2007. In other words, it is flashing signs that the market has gotten too bullish and it's about time to reduce exposure. "Increasingly euphoric sentiment is a key reason for our neutral outlook as the cyclical rebound, vaccine, stimulus, etc. is largely priced into the market," Bank of America equity strategist Savita Subramanian, said in a note. "Optimism has risen 3x the typical rate following bear markets. ... We've found Wall Street's bullishness to be a reliable contrarian indicator." The market is looking to build on a solid March following the rollout of President Joe Biden's infrastructure plan. The S & P 500 rose to a fresh record high above 4,000 on Thursday, marking the first time the equity benchmark has crossed the threshold. For 2021, the S & P 500 has rallied about 7%. While a hair's breadth away from a sell signal, Bank of America's indicator is still currently neutral, meaning that returns can be less predictable and tepid, Subramanian noted. The current level is projecting a 12-month return of just 6%, which is much weaker than the average 12-month forecast of a 14% gain since the end of the financial crisis, Bank of America said. Bank of America sees the S & P 500 falling to 3,800 by the end of 2021 , a roughly 5% decline from here. The bank's view is more bearish than Wall Street's consensus. The CNBC Market Strategist Survey that rounds up 15 top strategists' forecasts shows that the year-end target for the S & P 500 stands at 4,099, representing only a 2% gain here. "Investors are best served focusing on areas [with] sensitivity to the real economy such as cyclicals/value, capex beneficiaries and small caps as we await the next stimulus package focused on infrastructure," Subramanian said. President Joe Biden introduced his multitrillion-dollar infrastructure proposal last week. The plan includes spending on roads, bridges, green energy and water system upgrades. The plan includes roughly $2 trillion in spending over eight years and would raise the corporate tax rate to 28% to fund it. Higher taxes have been a top-of-mind concern for many investors, as they could pose a threat to corporate earnings growth. "The market appears to already be pricing in additional stimulus and the focus is shifting to paying it back (i.e., higher taxes)," Subramanian said. "Valuations today are signaling anemic long-term returns and rising rates are also a headwind for both income investors, who have piled into equities amid low rates and corporate margins."

Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 5, 2020 at Wall Street in New York City. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)

Photo by Johannes Eisele | AFP | Getty Images

As reopening optimism keeps pushing the stock market to all-time highs, it's almost time to sell, according to a Bank of America market gauge with a strong short-term track record.