The stock market might be making fresh nominal highs, but Wall Street strategists aren’t yet buying into the hype. Historically this is great for stocks, because sell side consensus is usually wrong. We look at their stuff as contrarians and shoot to position ourselves in the opposite direction, as long as our risk management procedures allow for it of course. So when strategists have been extremely bullish in the past, we look at that as a reliable sell signal. The same goes for times when they’re too bearish. This is typically the best time to ignore the pessimism and do some buying instead.
Bank of America Merrill Lynch has a Sell Side Indicator that measures Wall Street’s consensus equity allocation. Their model closed out the year at 47.0, which is still near a historic low. This is telling us that although equities keep melting up, bearishness on equities remains at extremes and firmly in “Buy Territory”, according to the model (click chart to embiggen):
This data goes back to 1985 and hit an all-time low this past summer. As you can see, we haven’t bounced much. Historically when the indicator falls below 50, total returns over the subsequent 12 months have been positive 100% of the time. BofA/ML’s model suggests a 26% 12-month price return based on the current bearish sentiment readings.
I felt this was an interesting take as we hear some of the opposite things out there on The Street: Citi’s technician Tom Fitzpatrick sees the current price action as too similar to 2007, the VIX is at multi-year lows and short interest is falling fast. It’s important to us to make sure we consider both sides.
Tags: $VIX $SPY