Five Septembers after its big near-death experience, Wall Street should be giddy to be so alive right now. Banks are again flush with profits, dividends, and bonus-pool avarice. The keepers of the Dow Jones Industrial Average are ordering up a giant helping of that Goldman Sachs (GS) calamari. The stock market is up 150 percent in a little over four years, to just shy of its record. Much of the Great Meltdown seems like such a distant hallucination now.
Yet in at least one respect, Wall Street is as bearish as it was in the throes of March 2009, when fear so prevailed that the market tested lows unseen since 1996.
Sell Side Consensus Indicator (as of 31 August 2013) *Source: BofA Merrill Lynch
Savita Subramanian, head of U.S. equity and quantitative strategy for Bank of America Merrill Lynch (BAC), notes that the firm’s Sell Side Indicator, its measure of Wall Street bullishness on stocks, has improved in 10 of the last thirteen months. After hitting an all-time low of 43.9 last July, it’s now at its highest level since April 2012. 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. Subramanian points out that this consensus equity allocation has historically been a reliable contrary indicator. It’s bullish for the market when Wall Street is extremely bearish, and vice-versa.
Here’s the thing: Despite hitting a 16-month high, the sentiment reading remains far from what qualifies as bullish. Indeed, for everything good that’s going on right now in markets and high finance, Wall Street bearishness is now as strong as it was at the market lows of March 2009. According to Subramanian, strategists are still recommending that investors significantly underweight equities at a 53 percent allocation, compared with a traditional long-term average benchmark weighting of 60 percent to 65 percent. The Standard & Poor’s 500-stock index has gained nearly 20 percent since the indicator bottomed in July 2012.
“Given the contrarian nature of this indicator,” she writes, “we remain encouraged by Wall Street’s ongoing lack of optimism and the fact that strategists are still recommending that investors significantly underweight equities.”
BofA Merrill last clocked its Sell Side Indicator at just under 53 percent (consensus Wall Street equity allocation). That’s well shy of a 15-year average of just over 60 percent: The reading flashes a “sell” signal to investors when it hits 66 percent. Historically, when it has been this low or lower, total returns over the subsequent 12 months have been positive more than 95 percent of the time, with median 12-month gains of 27 percent.
Says Subramanian: “It suggests Wall Street sentiment is far from the euphoric levels that generally represent the top of the market.”
So much for that 2009-vintage meme that buy-and-hold investing was dead.