- A contrarian buy indicator suggests the S&P 500 is poised to jump 7% to 4,400, Bank of America said in a Friday note.
- But investors should then short the stock market as its long-term downtrend is expected to resume, the note said.
- “No Fun Till Fed [is] done, and in 2022 this requires [a] negative payroll footprint,” BofA said.
The stock market is poised to rebound 7% from current levels as a contrarian indicator flashes “buy,” Bank of America said in a note Friday.
Bank of America’s Bull & Bear indicator fell to 0.4 this week, representing an extreme contrarian “buy” zone that investors should take advantage of, the note said. A continuation of the ongoing rally would send the S&P 500 to 4,400, according to the note.
But at those levels, investors should short the stock market, the note said, as Bank of America expects the long-term downtrend to resume. “Bearish rally continues to SPX 4,400 then go short,” the bank said in its weekly “Flow Show” note.
The bank pointed out that bear market rallies are normal during major stock declines, as the Nasdaq had eight bear rallies with a minimum gain of 18% during the bursting of the 2000-2002 dot-com bubble. A similar rally would push the Nasdaq 100 up 8% from current levels at 13,000, BofA said.
But what ultimately drives the stock market, and its long five-month stretch of relentless selling, is the Federal Reserve’s current quantitative tightening cycle. Investors expect at least two more 50 basis point interest rate hikes at the June and July Fed meetings, and a September rate hike is also on the table.
Meanwhile, the Fed kicked off its balance sheet reduction program this week, with its $9 trillion balance sheet clearing about $45 billion of Treasuries and mortgage bonds a month. This amount is expected to increase to around $90 billion over the summer months.
“Central banks [are] just started, [with] terminal prices tend to increase across the G7 [countries]… no pleasure until [the] fed [is] done… and in 2022 it requires [a] negative impression of payroll,” BofA explained. The bank pointed to 1974, 1981, 1994, 2009 and 2018 as inflection years when the stock market did not perform well until the Fed took a less hawkish stance.
“Quantitative easing was the catalyst for a 12-year tech boom; tech discounts end, but central banks [are] now ready to reduce
$3 trillion [over the] the next 18 months, [the] the fact remains that the era of quantitative easing is over…as is the era of technology 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 credit recovers from its recent weakness and shows signs of strength, as that would be a signal that credit markets are unlikely to crash as they have done so in previous years. economic recessions.