The market may be in rally mode to kick off March, but a challenging February brought on by a rising 10-year yield is still fresh in the minds of a mostly bullish Wall Street.
A new note out of Bank of America Global Research on Monday will do nothing to alleviate the fresh concerns of the bulls.
BofA's Sell Side Indicator — which is the average recommended equity allocation by sell-side strategists — gained by about one percentage point to 59.2% in February from 58.4% in January. It's the second month in a row of a roughly one percentage point increase. At its current level, the recommended equity allocation is near a 10-year high and just shy of a "sell" signal, says BofA equity and quant strategist Savita Subramanian.
Subramanian points out the last time the indicator was this close to a sell signal was June 2007 — the market then went onto see 12-month returns of 13%.
"The indicator still remains in "Neutral" territory where it has been since December 2016. Although returns are less predictable when the indicator is "Neutral" compared to extreme "Buy" or "Sell" levels, when the indicator is at or below current levels, subsequent 12-month returns have historically been positive 89% of the time," Subramanian says. "While encouraging, the current level is forecasting 12-month returns of just 7%, a much weaker outlook compared to an average 12-month forecast of 16% since the end of the global financial crisis. However, past performance is not an indication of future results."
Even with a tough February for markets and the pandemic continuing to weigh on global growth, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite are all up more than 10% over the past six months. So it's not a surprise to see BofA's indicator reach a worrisome level given the supreme bullishness of the Street alongside a highly uncertain global economic recovery.
Subramanian joins others on the Street sending up a red flag on stock prices near record valuations because of the rise in yields.
"Other signs that suggests a weaker market outlook are rising yields, which pressure the TINA (There is No Alternative) argument and valuation. History suggests that 1.75% on the 10-year (the house forecast and ~25 basis points above current levels) is the tipping point at which asset allocators begin to shift back to bonds," Subramanian says.
BofA's Sell Side Indicator is in good company right now in hinting stocks are overvalued and overdue for an extended breather after a rally off the COVID-19 2020 lows.
Warren Buffett's favorite indicator — which takes the Wilshire 5000 Index (viewed as the total stock market) and divides it by the annual U.S. GDP — is still hovering around a record high. The Buffett Indicator — as it's known — stands at about 187.5% — up sharply from 175% or so when applying third quarter GDP data per GuruFocus.
The indicator remains in "significantly overvalued" territory, according to GuruFocus.
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