Key facts
- Bank of America's Sell Side Indicator is 0.3 percentage points away from a sell signal.
- The indicator reached its highest level since March 2022.
- Historically, the S&P 500 has gained an average of 3% over the 12 months following a sell signal.
- When the indicator has been at this level or higher, the S&P 500 has seen negative returns 36% of the time over 12 months.
Bank of America's closely watched Sell Side Indicator (SSI) is approaching a sell signal, indicating a potentially bearish outlook for the stock market. The gauge, which acts as a contrarian indicator, moved to 57.2% in September, just 0.3 percentage points away from triggering a formal sell recommendation. This marks the highest reading for the indicator since March 2022.
The SSI is designed to signal when Wall Street's equity strategists are becoming too bullish, suggesting a potential downturn. Historically, when the SSI has flashed a sell signal, the S&P 500 has seen weaker-than-average returns in the subsequent 12 months. Analysis from Bank of America shows that the benchmark index has gained an average of 3% in the year following a sell signal, compared to the historical average of about 10%. Furthermore, when the indicator has been at its current level or higher, the S&P 500 has experienced negative returns 36% of the time over a 12-month period.
The bank's equity and quant team noted that the SSI has been a reliable contrarian tool, though it does not predict every market move. The indicator's current trajectory coincides with a broader cautious sentiment among Wall Street forecasters, partly driven by rising bond yields. The 10-year and 30-year Treasury yields recently reached a 24-year peak. Despite major indexes hovering near record highs, underlying market health shows signs of strain, with market breadth hitting a record low relative to the S&P 500, according to Ned Davis Research. The median S&P 500 stock is also down 15% from its 52-week high, as reported by Rosenberg Research.