Michael Hartnett, an analyst at Bank of America Corp., suggests that technical obstacles are no longer a hindrance to a year-end rally in the S&P 500 index. Bank of America’s proprietary sentiment gauge, the Bull & Bear Indicator, has consistently flashed a contrarian buy signal for the third consecutive week. This signal arises in the context of weak equity market breadth, which refers to the number of rising stocks, and significant outflows from high-yield and emerging-market bonds, as noted in a report by the strategist.
The Bull & Bear Indicator has declined to 1.4, falling below the critical 2 level, which BofA indicates as a buy signal. The conditions that support this change include oil prices below $100 per barrel, yields remaining below 5%, and the S&P 500 trading above the 4,200 level. Michael Hartnett, who has held a pessimistic view on risk assets throughout this year, acknowledges the potential for renewed positioning. However, he cautions that widespread expectations for a substantial year-end rally are now prevalent.
Another team of Bank of America strategists recently indicated that a contrarian indicator is also nearing a buy signal. The current level of this indicator suggests a potential 15.5% price return for the S&P 500 over the next 12 months.
The S&P 500, which experienced a decline over the past three months, is currently on track for its best week in a year. Factors contributing to this positive trend include a retreat in oil prices and signals from Federal Reserve Chair Jerome Powell, hinting at the possibility that the US central bank may have concluded its most aggressive tightening cycle in four decades. Notably, the index briefly dipped below the key support level of 4,200 before rebounding due to a pullback in bond yields.
Hartnett observes that the decrease in oil prices is advantageous for central banks, which have been cutting rates at their fastest pace since August 2020. The stability of oil prices since the start of the Israel-Hamas conflict, according to Hartnett, may suggest a world economy closer to recession.
Despite these dynamics, investors have continued to pour funds into safe-haven cash accounts. Flows of over $64 billion in the latest week have resulted in annualized inflows of $1.3 trillion, with equity funds experiencing withdrawals of $3.4 billion while bonds enjoyed inflows for the fourth consecutive week, absorbing $4.5 billion, based on data from EPFR Global cited by Hartnett.
