- A contrarian buy indicator suggests the S&P 500 is poised to rise 7% to 4,400, Bank of America said in a note on Friday.
- But investors should then short the stock market as the longer-term downtrend is likely to continue, according to the release.
- “No fun until Fed [is] done, and that requires in 2022 [a] negative payroll pressure,” BofA said.
The stock market is poised to rally 7% from current levels as a contrarian “buy” indicator lights up, Bank of America said in a note on Friday.
Bank of America’s Bull & Bear indicator fell to 0.4 this week, marking an ultra-contrarian “buy” zone that investors should exploit, according to the release. A continuation of the ongoing rally would push the S&P 500 to 4,400, according to the release.
But at these levels, investors should short the stock market as Bank of America expects the longer-term downtrend to resume. “The bear rally continues to SPX 4,400 and then goes short,” the bank said in its weekly Flow Show note.
The bank stressed that bear market rallies are normal during general stock declines, as the Nasdaq had eight bear rallies with a minimum gain of 18% during the 2000-2002 dot-com bubble burst. A similar rally would send the Nasdaq 100 up 8% from current levels to 13,000, BofA said.
But what is ultimately driving the stock market and its five-month relentless selling streak is the Federal Reserve’s current quantitative tightening cycle. Investors expect at least two more 50 basis point rate hikes at the Fed’s June and July meetings, and a September rate hike is also on the table.
Meanwhile, the Fed started its balance sheet trimming program this week, with its $9 trillion balance sheet shedding about $45 billion worth of Treasuries and mortgage bonds a month. That amount is expected to increase to about $90 billion over the summer months.
“Central Banks [are] I start now, [with] Final interest rates trend upwards in G7 [countries]…no fun until [the] fed [is] done… and that requires 2022 [a] negative payroll,” BofA explained. The bank highlighted 1974, 1981, 1994, 2009 and 2018 as turning point years when the stock market did not perform well until the Fed shifted to a less hawkish stance.
“Quantitative easing was the catalyst for the 12-year tech boom; Tech discount in the end but central banks [are] now set to reduce
by $3 trillion [over the] next 18 months, [the] The fact remains that the era of quantitative easing is over…as is the era of tech leadership in global equity markets,” BofA said.
The only thing that would change BofA’s relatively bearish view on the stock market is if high yield bonds rebound from their recent weakness and show signs of strength, as that would be a signal that credit markets are unlikely to pick up as much as they have done in past economic recessions.