BofA Sees Cracks Finally Forming in Traders’ S&P 500 Bearishness

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(Bloomberg) — Market optimists, rejoice. Dip buyers haven’t completely abandoned the US stock market, judging by at least one technical lens.

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Bank of America Corp.’s so-called sell-side indicator ticked higher in August for the first time since October 2021. The gauge assesses Wall Street sentiment toward American equities on a monthly basis, based on asset-allocation recommendations provided to the bank and Bloomberg.

The development offers a ray of hope for stock bulls that witness no end to selling in sight with the S&P 500 working on its fifth consecutive decline. Still, there’s no ground for celebration: even as sentiment showed an improvement for the full month, optimism has diminished following Aug. 26’s hawkish commentary from Federal Reserve Chair Jerome Powell.

“Improved sentiment, especially following a 17% rally off the June lows, suggests the bulls haven’t fully capitulated yet,” Savita Subramanian, Bank of America’s head of US equity and quantitative strategy, wrote in a note to clients. “We still see no real signs of a bull market and maintain our 3,600 year-end target on the S&P 500.”

That would imply a 9% slide from Wednesday’s close.

Signs that investors are questioning whether the stock-market rout has further room to go comes as the S&P 500 has erased 60% of its 638-point rebound between mid-June and mid-August. The S&P 500 is trading 0.9% lower on Thursday as investors await a critical unemployment report on Friday that will help shape the Fed’s view on the pace of interest-rate hikes.

Read: Citi Says There Is ‘Little Interest in Dip Buying’: Taking Stock

The bank’s proprietary sell-side indicator has been a reliable contrarian signal in the past. In late November 2018, the gauge was close to euphoric levels, just before the S&P 500 fell to the brink of a bear market. Currently, the indicator is hovering near a neutral zone, a less predictive range than the more extreme “buy” or “sell” levels.

Subramanian’s year-end target for the S&P 500 ties for the second-lowest among major Wall Street strategists tracked by Bloomberg. She says the market is yet to fully see the impact of the Fed’s quantitative tightening program, which will ramp up to its full potential in September.

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