There’s been a lot of talk about the market’s frothiness, maybe too much talk. Sure the S&P 500 has gained 23% this year, while the Dow Jones Industrial Average has gained 19%, but Wall Street, at least, is as bearish as it was back in 2009.
AFP Bank of America Merrill Lynch’s Savita Subramanian explains:
The Sell Side Indicator — our measure of Wall Street's bullishness on stocks — dipped in October to 52.8 from 53.1, reversing last month’s improvement. This marks only the second decline in the 15 months since hitting an all-time low of 43.9 last July. The indicator still remains in "Buy" territory, as Wall Street's bearishness is still as bad as it was at the market lows of March 2009. Given the contrarian nature of this indicator, we remain encouraged by Wall Street's ongoing lack of optimism and the fact that strategists are still recommending that investors significantly underweight equities at 53% vs. a traditional long-term average benchmark weighting of 60-65%. Even though the S&P 500 has risen by 27% since sentiment bottomed, history suggests that strong equity returns can last for years after the indicator troughs.
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How much higher can stocks go? A lot higher:
With the S&P 500's indicated dividend yield above 2%, that implies a 12-month price return of 17% and a 12-month value of 2050. Although this is not our S&P 500 target, this model is an input into our target, which incorporates valuation, sentiment and technicals. Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive more than 95% of the time, with median 12-month returns of +27%. Past performance is not an indication of future results.
After being up as much as 0.5% today, the S&P 500 has dropped 0.2% to 1,753.51 today at 12:15 p.m. The Dow Jones Industrials are little changed at 15,547.87.
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