Bearishness may spark near-term stock rally, says BofA
Investor positioning in stocks has become so bearish that it’s triggered a “contrarian buy signal” in a custom Bank of America Corp. indicator, setting up the asset class for a short-term rally, according to strategist Michael Hartnett.
The BofA bull-and-bear reading dropped to 1.9 from 2.2 in the week through Oct. 18, driven by outflows from emerging market debt funds, high-yield bonds and global equities, as well as a jump in allocation to cash, Hartnett said. A drop below 2 is seen as a contrarian signal of a near-term rally.
In the three months following 20 such occurrences since 2002, US stocks showed a median gain of 5.4% and global equities a 7.6% advance, the strategist wrote in a note dated Oct. 19.
“Investors are sufficiently bearish” for the S&P 500 to hold above 4,200 points and the yield on the 10-year Treasury to find a ceiling at 5% for the next three-to-four weeks, Hartnett said. “Put another way, if the index can’t hold at 4,200 with this level of bearishness, then there may be imminent risks of a credit event or hard landing,” he added.
Hartnett has remained broadly bearish this year, even as stocks rallied in the first half.
The benchmark S&P 500 closed Thursday at 4,278 points — about 1.9% above 4,200, which is also close to the index’s 200-day moving average. That’s considered a key technical support level and used by traders to assess whether the longer-term trend is up or down.
US stocks are tracking a third straight month of declines in October after bond yields surged on worries that central banks will remain hawkish for longer. The 10-year Treasury yield inched toward 5% on Thursday, before pulling back as Federal Reserve Chair Jerome Powell said the central bank was inclined to hold interest
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