Bank Of America’s Sell Side Indicator Shows Wall Street Is Not Optimistic

Bank of America’s Sell Side Indicator, a measure of Wall Street’s bullishness, rose by 0.5 to 54, its highest level since March 2014 during May. While it may seem like all of Wall Street is bullish on equities as the market continues to grind higher every day, this indicator shows that the sell side is, in fact, neutral on many stocks, and sentiment towards equities is only improving on Wall Street, not running away.

Bank of America’s sell side indicator details

According to Bank of America’s research, which is outlined in a Sell Side Indicator report issued earlier this week, the current level of sentiment is only in “neutral” territory and has hardly budged for the past six months. Even though sentiment has improved dramatically from the 2012 bottom of 43.9, today sentiment levels are barely above where they were at the market lows of the financial crisis.

The low recorded during 2012 was, in fact, the most pessimistic reading from the sell side since 1985, when Bank of America started the Sell Side Consensus Indicator. During the financial crisis, the indicator didn’t even tick below 51.

The Sell Side Indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month and is, according to Bank of America’s analysts, a reliable contrary indicator. For example, historically when the Sell Side Indicator has been as low as it is today, or lower, total S&P 500 returns over the subsequent 12 months have been positive 93% of the time with median 12-month returns of 21%.

Nonetheless, while these figures may indicate that now is the time to buy stocks as Wall Street’s pessimism erodes, Bank of America’s report on the topic notes quite clearly that that past performance is not an indication of future results, and therefore these figures should not be relied upon for trading purposes.

That being said, the analysts estimate that the S&P 500 could produce a total return of 16% or more over the next 12 months thanks to an implied 12-month price return of 14% (based on performance after historic sell side readings) and a dividend yield of 12%.

Of course of this tick up in positive sentiment could also signal the first step towards market euphoria “that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle” the report concludes.

(Click on image to enlarge)