A famed stock signal from Bank of America is teetering on the edge of the red zone.
Bank of America’s Sell Side Indicator is on the edge of a new sell signal. The gauge is a contrarian indicator, with extreme bearishness indicating it could be time to buy, while extreme bullishness says sell.
In a note to clients this week, the bank said the indicator increased from 56.4% to 57.2% in September — just 0.3 percentage points shy of official “sell” territory.
The latest increase also brings the indicator to its highest reading since March 2022, BofA’s equity and quant team said. Historically, a sell signal has been a predictor of further weakness in stocks. In previous instances the SSI has flashed a sell signal, the S&P 500 has gained an average 3% over the next 12 months, lagging the historical average of about 10%.
When the indicator has been at this level or higher, the benchmark index has seen negative returns over the next 12 months 36% of the time, the bank said, citing its analysis of stock data stretching back to 1985.
“The SSI has been a reliable contrarian indicator,” the bank wrote. “While the SSI does not catch every rally or decline in the stock market, the indicator has historically had better predictive capability for subsequent 12-month S&P 500 total returns than many other market timing tools.”
More forecasters on Wall Street have been turning cautious on stocks lately, particularly as bond yields continue to rise. Yields, which are thought to be a negative to risk assets as they move higher, have spiked due to a mix of economic and fiscal concerns. The 10-year and 30-year yields both touched a 24-year peak this week.
The major indexes are still hovering near records, but damage is accruing beneath the surface as stocks outside of the tech and AI trade take a hit. Market breadth, a measure of the percentage of winning stocks in the market, recently hit a record low relative to the overall level of the S&P 500, according to an analysis from Ned Davis Research. The median S&P 500 stock is also down 15% from its 52-week high, per an analysis from Rosenberg Research.