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Merrill Lynch continues to point out that the Street remains unenthusiastic about stocks:

Sentiment ticks up to highest in 13mos, but still far from bullish
The Sell Side Indicator — our measure of Wall Street’s bullishness on stocks — ticked up just slightly in June to 49.8 from 49.6. The indicator has improved in eight of the last eleven months after hitting an all-time low of 43.9 last July, and is now at its highest level since May 2012, when it first flashed a “Buy” signal. The indicator still remains firmly in “Buy” territory, however, as Wall Street’s bearishness on equities remains at extreme levels relative to history. Given the contrarian nature of this indicator, we remain encouraged by Wall Street’s ongoing lack of optimism and the fact that strategists are recommending that investors significantly underweight equities at 49.8% vs. a traditional long-term average benchmark weighting of 60-65%. Even though the S&P 500 climbed 20% from when sentiment bottomed to its all-time-high in May, history suggests that strong equity returns can last for years after the indicator troughs.

Indicator’s expected 12-month total return is +24%
With the S&P 500’s indicated dividend yield above 2%, that implies a 12-month price return of 22% and a 12-month value of 1955. 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 below 50, total returns over the subsequent 12 months have been positive 100% of the time, with median 12-month returns of +30%. Past performance is not an indication of future results.

A reliable contrarian indicator
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. We have found that Wall Street’s consensus equity allocation has historically been a reliable contrary indicator. In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa. See our December report for more details on the Sell Side Indicator.

Very interesting stuff . . .



Sell Side Indicator: Wall Street Still Lukewarm on Equities
Savita Subramanian
Merrill Lynch Research, 01 July 2013

Category: Sentiment, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Wall Street (Still) Lukewarm on Equities”

  1. denim says:

    Forecasting again. The charts say what is and that does not include this afternoon either:
    Blue chip Dow theory chart by Yahoo Finance:

    • You misunderstand the difference between an analysis of assorted factors with historical tendencies and forecasting.

      This is a correlation study, plain and simple with a decent track record of revealing a repeateable psychological pattern of an admittedly small mathematical set.

      That is not forecasting . . .

  2. Lamont says:

    “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.”

    Since all stocks and bonds must be held at all times and there has been a huge amount of new bond issuance and no new stock issuance on net since 2009, doesn’t it make sense that allocations have to adjust for that?

    • No, this is a sentiment measure, not a total outstanding assets measure

      • Lamont says:

        Since there are far more bonds and less stock than in 2008, then current allocations have to be far more heavily weighted to bonds than to stock now compared to 2008 purely as a function of math (all else being equal). So this means the sentiment isn’t nearly as negative as the chart probably makes most believe. While recommended allocations towards stocks are much lower than pre-financial crisis, it doesn’t tell readers what the recommended allocation towards stock is relative to what those allocations towards stocks actually are and have been in the past; that information would make the chart far more meaningful. You also have to throw demographics in there too with the big wave of baby boomers getting older and requiring a smaller allocation toward equities.

      • You have an erroneous understanding of what drives allocations.